Insurance – The Next Generation

April 25, 2024

In an accident? Pelted by a freak hailstorm? Hit a deer? The universal answer to all of these problems has for over a century been car insurance. The first car insurance policy was taken out by a Dayton, Ohio resident in 1897, covering the owner in case the vehicle damaged property or hurt/killed an individual. Since then, the car insurance market has ballooned into an enormous industry, with the US car insurance market valued at nearly $400 billion in 2023. Car insurance rates have grown steadily with the increasing price and complexity of new vehicles. With average new car prices reaching a staggering $47,000 in 2023, it is no secret that premiums are on the rise. Cars now have hundreds of sensors collecting the data required for advanced mobility and connected car features. No longer does a simple fender bender cost a few hundred dollars to repair. Although these sensors have undoubtedly led to a reduction in the number of accidents, total repair costs across all accidents are rising. Now when there is a collision, dozens of sensors/cameras may have been destroyed, skyrocketing the price into the several thousand dollar range. In addition, supply chain issues have led to delays in repairing vehicles and in higher replacement parts costs, leading to insurance company losses. Independent and OEM-based insurance companies are seeing green due to the overall size of the market, but the business model isn’t so simple. Oversaturated market space, rising repair costs, and challenges around privacy are providing surprise roadblocks to profitability and success. The key question in industry minds is this: how does next generation car insurance become a profitable and customer-centric business?

The cost to build cars has increased dramatically since the turn of the century. In the last 25 years, cars have functionally evolved into computers with wheels. In 2000, only the highest end luxury vehicles were starting to see simple head units integrated into the center dashboard. Now, many cars have screens spanning the entire dashboard, containing vital information such as the tachometer, speedometer, radio, and navigation systems. All of these technologies require constant data receipt and transmission, and the average new car has around 1500 semiconductor chips to handle these intensive processes. Some cars have up to 3000. Coupled with all of the other technologies needed to enable partial self driving, sonar, 360 cameras, and EV charging, car insurers have to account for much more than the mechanical components that propel a vehicle forward and turn it. Dealing with thousands of dollars in computing technology has logically increased premiums and squeezed profit margins for insurance companies using traditional algorithms to charge customers. As a result, many car insurers have turned to utilizing these advanced technologies to calculate driver scores and other methods of maximizing profitability. However, if not done correctly, next generation insurance is deceptively difficult.