Introduction
Nowadays, vehicle insurance is a crucial part of people’s lives. In the United States, numerous policies require drivers to have any type of insurance coverage on their cars. Therefore, this product is more often viewed as a nuisance and associated with adverse events. It might come as costly, unnecessary at most times, and the vast majority of plans was not suitable for people who have the need for a vehicle for a short time. In recent times, insurance companies took advantage of new technologies to provide sustainable plans for people who encounter these problems when choosing what type of insurance will suit them the best.
The product I chose is insurance coverage for specific periods. Many disruptive technologies stem from the internet of things (Ralph, 2019). One of them is flexible insurance coverage, which allows vehicle owners to optimize their spendings and pick the option that satisfies their needs. This essay overviews the recent emergence of usage-based insurance policies, how they changed the situation for insurance companies, what is their target customer base, and how competitive this new type of market is.
Environmental Situation
Flexible insurance is a disruptive technology that allowed companies to develop a highly customizable set of plans which rely on varied rates of car accidents due to different factors. These factors include high traffic amount, the location of the vehicle, the driving style of vehicle users, and adherence to the road rules (Sims & Walker, 2020). The primary source of this technology is the development of advanced tracking devices and the increased availability of analytical means that can work with massive amounts of data. Gupta (2020) states that, in 2018, “about 80 percent of new car sales in the US were equipped with onboard telematics.” This industry is in its early stage of development, yet it already shows a promising future. Nowadays, not all states are covered by the primary types of usage-based insurance.
Insurance companies often provide tracking devices for their customers for free or offer them to install a phone application that uses an accelerometer and GPS to monitor all necessary information. These devices collect data regarding fuel consumption, braking and accelerating behavior, idling time, location, speed of the vehicle, and any issues in the car’s systems (Sims & Walker, 2020). Moreover, if the tracking is conducted via a mobile application, it collects data about cellphone use while driving as it increases the chances of getting into an accident (Sims & Walker, 2020). The market experiences a slight slowdown in growth partially due to the nature of these devices, as there are numerous concerns regarding the privacy and security of collected information (Sims & Walker, 2020). To this day, many companies use application-based telematics, which can be viewed as more intrusive, since it requires access to the customer’s phone (Sims & Walker, 2020). A separate tracking device is preferable by people who put a significant emphasis on the privacy and security of their personal information. With the ever-evolving technologies, it will be possible to alleviate these concerns, and the market will grow even faster than it does now.
Competition
While the market for vehicle insurance is massive and oversaturated with highly competitive companies, usage-based insurance targets a smaller population. Telematics is expected to be implemented for meaningful use by over 70% of insurance companies in the United States during this year (Gupta, 2020). The most significant competitor on the usage-based market is GEICO – the second-largest car insurance company – who recently began providing the pay-as-you-go type of car insurance. Its primary strengths are higher publicity and general renown, however, it does not offer a discount for safe driving and implemented telematics in very recently, and only in two states (Sims & Walker, 2020). The largest companies on the market do not cover its majority, which signals the availability to enter it.
Many competitors on this market have taken a selective approach, and their products are appealing for a relatively small portion of the market. For example, MetroMile provides usage-based insurance, yet it focuses on the pay-per-mile type of coverage, does not account for drivers’ behavior, and is not available in many states (Hunt, 2019). In turn, Progressive Insurance enables drivers to receive a substantial discount of up to 30% based on their behavior over a 30-day evaluation period, but it does not cover all states (Hunt, 2019). The fact that many states are excluded from the coverage of the main competitors leaves significant space for the entrance.
Another significant competitor is Allstate, which has a discount program for customers who are known for their safe driving. It gives an option to install a telematics device that will evaluate the customer’s driving style. However, the policy for qualification is strict, and the driver is required to use the car for at least 90 days in six months (Hunt, 2019). Other competitors similarly rarely provide a direct calculation of premiums depending on the vehicle usage rate. Instead, they often offer a discount up to a certain amount, which does not exceed 40% in most cases (Hunt, 2019). It is crucial to establish the desired market share and a location where this opportunity can be put into realization.
To become a challenger on this market, my company will need to discover the state which is the least covered by the companies that provide the most flexible insurance coverage, for example, Colorado. The desired competitive advantage for my company will be produced by a personalized program for each customer, who will be able to choose a program that supports his or her driving style and needs. The primary feature will include hourly usage rates, which will enable the company to calculate premiums based on the chances of getting into an accident while driving during a specific time in a given location. For example, when competing with Allstate, who also operates in Colorado, my company can set a low initial fee with added price per mile per time of the day, instead of providing a discount. In conclusion, flexibility is the main attraction of this market, and my company must exploit this concept to the limit to stay competitive.
Target Market
To compete for a share of this market, it is crucial to understand how people view the product. The product in question is highly sought after nowadays since it allows customers to save a considerable sum of money. People who do not actively use cars, beginners who are charged with higher premiums due to their lack of experience and people who drive safely are the primary customers for the companies in this field. Cassells (2020) states that “some insurers charge less for miles driven when the roads are emptier and accidents less likely.” It is vital to present this product as desirable for people who aim to save on insurance or to put effort into decreasing the frequency of vehicle usage.
The primarily targeted demographics contain students and beginner drivers who aim to reduce the initial spike in insurance costs. Since it was established that people who are less prone to car accidents would benefit from this type of insurance the most, advertisements should also attract people with a clean driving record. Pay-per-mile and specific daytime tariffs are not mutually exclusive, it is also vital to count people who drive less than 10,000 miles annually as the potential customers.
The market for usage-based insurance coverage is relatively new due to the recent technological advancements that enabled its creation, yet it shows a promising future. Gupta (2020) argues that the usage-based insurance market “is projected to reach USD 125.7 billion by 2027 from an estimated USD 24.0 billion in 2019, at a CAGR of 23.0%” during that period. Moreover, Gupta (2020) states that “North America is estimated to be the largest market for usage-based insurance owing to the high adoption rate of usage-based insurance in new and on-road vehicles equipped with telematics units.” These statistics, coupled with a relatively low concentration of firms, signify the current window of opportunity to enter the market at the peak of its growth.
Most companies also take into account the driver’s mileage per time period, and the technology that monitors vehicle usage also allows insurance companies to detect the driver’s compliance with road safety rules. Moreover, faulty telematic devices can incur high costs for customers and require closer monitoring for the user (Sims & Walker, 2020). Insurance companies need to monitor the status of telematic devices to avoid unnecessary expenditures. To create a sustainable business in this market, a company must first obtain a technology that will suffice all customers’ needs and preferences while also including all of the required functions.
Relevant trends and similar markets include temporary car insurance and pay-per-mile type of insurance. They aim to achieve the same result as hourly/specific days insurance policies – the reduction of insurance payments for customers who do not use the vehicle often, drive safely, or struggle with high premiums for regular car insurance. It is possible to expand the available programs with these options to increase the flexibility of insurance coverage further.
My Portion of the Target Market
The target market can include lower-income households, as well as people who do not intend to use their vehicles often. Since I chose Colorado for an example, my company will need to appeal to low-income households. In 2016, this percentage reflected approximately 33% of the total population of Colorado, which equals 1.82 million of potential customers (Ely & Propheter, 2018). It is essential to communicate with customers regarding these benefits and take their preferences into account. By having face-to-face communications with customers, a company can increase the efficiency of interactions, achieve more positive reception, and observe customers’ behavior directly (Kotler & Keller, 2016). Statistics show that an average driver from a lower-income household in Colorado drives approximately 12,825 miles annually and pays $1,169 for car insurance (Ely & Propheter, 2018). Based on these numbers, my company will be able to calculate a suitable price that will make our services more desirable.
References
Cassels, K. (2020). Pay as you go insurance. Web.
Ely, T. L., & Propheter, G. (2018). Colorado’s middle-class families: characteristics and cost pressures. The Bell Policy Center.
Gupta, S. (2020). Usage-based insurance market worth $125.7 billion by 2027. Markets and Markets. Web.
Hunt, J. (2019). The 7 best usage-based insurance options of 2020. The Balance. Web.
Kotler, P., & Keller, K. L. (2016). A framework for marketing management (6th ed.). Pearson Education.
Ralph, O. (2019). Insurance sector prepares for disruption. Financial Times. Web.
Sims, M. B., & Walker, D. (2020). Usage-based car insurance and telematic systems [Easy guide]. AutoInsurance. Web.