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June 27, 2022

InsurTech Can Help Lower Auto Insurance Rates

The advance of technology has impacted almost every aspect of the automotive industry, from GPS devices to anti-collision technology and even autonomous vehicles.

But there’s another technological frontier developing along a parallel path: insurtech. Insurtech is set to make major changes in the insurance industry, most notably in the area of car insurance. This may even be good news for consumers, who might see their car insurance premiums lower as a result of insurtech.

What Is Insurtech?

First, let’s take a quick look at what insurtech actually is.

Insurtech employs data capture and usage pattern analytics to help determine the risk level of a particular driver, then setting the price accordingly. Insurtech devices such as telematics devices use real-time data to determine the driving habits of the drivers, the mileage driven, acceleration, brakes, cornering, and other information. This has proven particularly effective during the pandemic, when many people’s cars were sitting in garages and not being used — thus dramatically reducing the potential for an accident. With an insurtech-based policy, that lowered risk could be analyzed and the premium dynamically altered.

Why Insurance Prices Are on the Rise

Why is insurtech’s impact on car insurance premiums important? Because car insurance premiums have been on the rise, creating financial stress among a populace already dealing with economic issues created by the pandemic. There are a few reasons why:

For one, the technologies inside cars have changed, becoming more sophisticated and expensive, both to replace and repair. Repairing a car is not like it used to be — the skill sets mechanics need to service modern vehicles are very different from those of thirty years ago, and the parts are much more complex.

There’s also the issue of rising medical costs. Car insurance is as much about the humans as the vehicles themselves, and injury claims have a major impact on premiums.

Finally, there are the more common factors that raise premiums keeping in step with inflation. Formerly cheap car insurance premiums might rise because of crime statistics, high number of uninsured drivers, incidence of fraudulent claims, and natural disasters like hurricanes or wildfires.

How InsurTech Can Help Lower Auto Insurance Rates

Now let’s talk about how insurtech can help bring those premiums back down for consumers.

The most important overarching innovation of insurtech is the ability to dynamically set premium prices based on the data received. In a more traditional insurance scenario, a policy is set based on fairly static data: the kind of car the policyholder drives, their age demographic, marital status, driving record, whether they’ve taken a defensive driving course, etc. With insurtech, risk factors can be assessed more dynamically, based on real usage data, rather than abstracted models.

As mentioned above, this can come in handy with pay-per-mile insurance plans, where the less you drive, the lower your premiums can be. With insurtech, this data can be collected and analyzed without the driver having to resort to providing odometer readings or even taking much action.

These same analytics can be used to assess risk across a wide spectrum of factors: gender, age, zip code, vehicle type, number of collisions, threat of theft, etc. With the benefit of machine learning and data analytics, policies can be shifted from a one-size-fits-all model to policies that are uniquely personalized and individually suited to their policyholders — which will likely bring their insurance premiums down as well.

Finally, there’s the matter of fraud prevention. Fraudulent insurance claims are a major factor in the rise of insurance premiums; the money paid out for a fraudulent claim is eventually passed back to innocent consumers in the form of higher premiums. AI and machine learning is poised to change that in a few ways:

  • Better data interpretation: AI models can analyze a much broader and deeper spectrum of data, and the larger datasets grow on the matter of fraudulent claims, the more accurate the algorithms will get at noticing red flags that might indicate fraud.
  • Fast response time: it likely goes without saying that AI/ML fraud detection is going to be faster than human detection. This is particularly important because fraud prevention depends on rapid response, and an insurtech model, unlike a human analyst, can work 24/7 and even automatically reject a claim if it appears to be fraudulent.

The path to an all-insurtech model of car insurance is anything but clear. For one, these innovations require millions of dollars in investment for the technology, development, and sheer amount of data involved. There is also the matter of consumer adoption, which may be slow — there are legitimate privacy concerns about big data already, and some policy holders might find the thought of telematics devices or digital profiling to be intrusive. It might also be an uphill battle to get policyholders to change the way they think about, and interact with, their car insurance. But the promise of a lower premium is likely to go a long way.