The insurance industry is continuously reinventing itself as underwritten assets and consumer behavior change. This shift is particularly noticeable in an era where technological advancements have disrupted many traditional industries, especially those transitioning from product-based to service-based models, such as the mobility and automotive industry. EY teams have identified three key trends that are reshaping the motor insurance market in Sweden and will continue to do so in the future.
Transition from ownership to usership
The automotive industry has seen a transition from private car ownership to consumers opting for leased or shared cars over the past decades. Private car leasing allows customers to use a vehicle for a fixed number of years while retaining ownership with the automotive original equipment manufacturer (OEM). In Sweden, private leasing has become the prevailing method of acquiring new cars. Market experts estimate that private leasing in Sweden will continue to rise, reaching levels comparable to the American and the German market, where the majority of private individuals lease rather than buy new cars.
The surging popularity of private lease agreements over the past decade has led to a shift in the primary customer base for motor insurance. Instead of private individuals, the primary customers for insuring new cars are now the finance arms of auto OEMs. This transition necessitates a strategic re-evaluation of risk assessment, underwriting methodologies, pricing, and negotiation dynamics that insurance companies need to adjust to as customers are consolidating into one instead of many. Additionally, the market anticipates the emergence of more flexible leasing agreements, including shorter lease durations, the ability to switch cars during a lease, and sharing a lease with others. These changes are set to have a transformative impact on insurers’ way of doing their business.
Subscription-based car sharing and carpool services have emerged as new mobility options that allow consumers to use vehicles for short periods and pay based on actual usage. While these services show promise, they are yet to reach their full potential in Sweden due to low penetration levels and high operating costs, resulting in some market players exiting the market. Although car sharing models are expected to persist, a reinvention of the operating model is required to ensure long-term success. This transformation should be accompanied by a change in consumer mindset, leading to higher usage levels and making these services more economically viable.
Acceleration of usage-based insurance
Advancements in vehicle technology have induced a new level of sophistication in motor insurance solutions. An example of this is usage-based insurance (UBI) that calculates insurance premiums based on the actual driving behavior of the insured vehicle. UBI leverages real-time data on driving behavior, including abrupt braking, aggressive maneuvers, and collision-warnings. The data is then used to determine the driver’s risk profile and provide more accurate and personalized insurance plans. UBI’s data-driven approach not only incentivizes safer driving and also offers monetary rewards for such behavior. UBI has been available through telematic solutions and app-based systems. However, as cars become more technologically advanced and connected, data can be collected without additional devices.
Although UBI has existed for almost two decades, it is yet to establish dominance in the Swedish motor insurance landscape. Several major Swedish insurers have offered UBI in the past but have exited the market due to customers’ perspective of insufficient economic incentives and privacy concerns coupled with insurers’ challenges over data collection and premium setting. Notably, a market expert highlighted the availability of driving data from a substantial portion of leased vehicles that insurers could access, but there has been limited interest among insurers. In contrast, another market expert emphasized the industry's genuine interest in leveraging driving data to offer UBI solutions, despite technological infrastructure barriers.
Despite the current low UBI adoption rates, industry leaders strongly believe that UBI represents an inevitable path ahead for insurers. This conviction stems from the recognition that the conventional motor insurance model, relying on generalized premiums where low-risk drivers subsidize high-risk drivers, no longer aligns with evolving consumer expectations.
Auto OEMs as insurance providers
Auto OEMs have historically played a key role in the motor insurance value chain, predominantly as distributors of a large share of motor insurance policies. However, there are now signs of strain in the relationship between OEMs and insurers, indicating the inception of a structural transformation in the motor insurance landscape. A few OEMs, particularly in the US, have started offering their own insurance to customers, either in-house by establishing their own insurance entities or through fronting partnerships. The rationale behind this strategic shift centers on the desire to have greater control over customer experiences and relationships, thereby enhancing alignment with the OEMs’ value propositions. Providing more personalized solutions through UBI, empowers OEMs to move away from traditional underwriting-centric approaches, and pivot toward client-centricity instead.
The adoption of new insurance models grants OEMs a multitude of advantages:
- Outpricing the competition: Embedded connectivity empowers OEMs (particularly electrical vehicle makers) to access driving data for each driver. This data can be used to craft highly personalized UBI policies and premium plans for each driver, enabling OEMs to offer more competitive pricing than traditional insurers.
- Enhanced opportunity for product development and innovation: The wealth of available data empowers OEMs to rapidly enhance their product design and development, resulting in the augmentation of safety-focused features.
- Increased control over the customer life cycle: Providing insurance allows OEMs to retain the car within their network, amplifying their control over the customer experience and brand perception. This influence extends to various aspects, including the settlement of repair claims at authorized OEM repair facilities, which can guarantee the quality of products and services and potentially extend the life of the car.
- Diversification of revenue streams: The collection of insurance premiums and settling of repairs claims at OEM-owned repair shops diversify revenue streams and help OEMs find additional ways to increase their income.
Although the trend is more pronounced in the US, Nordic OEMs are showing early interest in venturing into their own insurance offerings. While the process may be lengthy, industry executives agree on the inevitability of this structural transition, gradually permeating the Nordic motor insurance landscape.
How can insurers respond to changes in the motor insurance space?
The dynamics within the motor insurance are set to create significant disruptions in the way motor insurance is provided. As the market environment undergoes a metamorphosis, insurers need to proactively position themselves to adapt to these transformations and reinvent their offerings to avoid the risk of becoming redundant:
- Adapt operations for enhanced flexibility: As the customer base is shifting from individual policyholders to OEMs, along with the emergence of mobility solutions like flexible car sharing and micro-leasing, insurers need to strengthen their operations to accommodate new models of risk assessment, underwriting strategies, and pricing dynamics.
- Develop personalized and agile insurance solutions: UBI is deemed to be the future of motor insurance. Insurers need to embrace technologically savvy setups to effectively navigate this shift. Additionally, it is an imperative to devise a well-defined process to acquire and retrieve data, addressing issues related to coordination, ownership, cost, and relationships with both OEMs and customers.
- Build ecosystems for sustained value: Insurers need to strengthen their position in the value chain to avoid being superseded by other providers. Through the strategic adoption of UBI and creation of ecosystems that offer essentials products and services for policyholders, insurers can solidify their position and create sustainable business models within the evolving motor insurance landscape. These products and services could include repair shops, car wash facilities, a marketplace for used cars, toll services, and charging stations for electric vehicles.
By embracing these structural changes in the motor insurance market and adopting the right strategies, traditional insurance companies can expand their business and become leaders in the motor insurance of the future.
