Psychology not technology will disrupt car insurance

Tuesday 04 December 2018

Article

Insurance is ludicrously expensive for the average driver - with vehicles insured 24 hours a day, but on average driven less than 10% of the time. The technology to charge by mile via telematics has been around for quite some time, so why have more people not switched to pay by the mile alternatives?

Quite simply the propositions haven't been very good. They have been designed around what the technology can do, and how insurers want to price, not how consumers actually work. 

There are multiple cognitive biases and barriers that are not taken into account. Humans have strong "loss aversion" and the risk of unexpected charges carries undue weight - this is why most consumers buy mobile phone contracts with unlimited calls and texts that they hardly use. Then there is the perception of a black box "spy" in the car watching how you drive. As if this wasn't enough of a disincentive, for most of these offers, you have to arrange to have a box fitted (usually by a technician appointment) - inertia is a powerful human bias, even when we stand to gain e.g. energy supplier switching, or rather the lack thereof.

These psychological factors trump the rational savings to be made, hence telematics policies have only really had traction amongst young drivers who have no choice.

What might a good proposition for mainstream drivers look like? Simple pricing with caps on usage and perception of control would be a good start. 

An example that is customer orientated and psychologically low friction is offered by startup ByMiles. A headline flat fee per year (c.£150), with pay per mile starting at 3p a mile up to a daily cap of 150 miles so the holiday to Cornwall won't break the bank. The accompanying smartphone app gives visibility journey-by-journey, enhancing the psychological feeling of control.

They are far from guaranteed to be a market winner - distribution will be a challenge when most online consumers are shopping via price comparison websites which are not easy for non-conventional pricing models to operate on. 

How could traditional operators respond if propositions like this take off?  Beyond simple copycat propositions, perhaps some psychological tactics of their own might help. The best bet is focusing on the segments with the least to gain (i.e. already low premium and fairly frequent driving) and harnessing loss aversion to emphasise the "unlimited" nature of their propositions and the risk of extra charges. Driving where you want, when you want, is still likely to be appealing to many.

John Evison, Associate Partner