One of the fundamental truths of economics is that we are always pushing for increased utilization. This is the drive to match allocation of resources to need. It can be increased in many ways. For example, a dinner-focused restaurant might increase use of its fixed assets by starting to offer breakfast and lunch too.
The push for ever-greater utilization is one way to think about the new sharing economy. Businesses like AirBnB and Lyft boost economic utilization of real estate and vehicles, respectively.
Annual view of insurance doesn’t have to be the norm
Insurance isn’t generally set up to increase utilization—except maybe the utilization of paper.
Consider workers’ compensation insurance. Today, when you buy a policy, you estimate the number of employees you will have this year. More than 90 days after your policy is complete, a reconciliation is done to see if your estimate was right or whether you will have a big swing up or down in the premium you owe. And this is one of the most “progressive” or “variable” forms of insurance in existence. For most other types of insurance, policies are annual, and based on the estimates for the year.
What this means is that if your business is changing significantly during the year, whether up or down, the insurance rate you are paying likely doesn’t match your actual exposure. This could be considered good if you are growing rapidly but is an added financial burden if you are shrinking.
The funny part is that this annual view of insurance—which only takes stock of your business’s activities, assets, employees or financials considered once a year—doesn’t have to be the model for insurance. For many types of insurance, the rate of insurance is calculated by risk factors that change all the time.
For example, a small business owner might pay a certain rate per employee on their policy. But the amount of premium is primarily driven by a measurable usage-based factor such as number of employees, amount of premium, miles driven, and so on. The critical challenge to offering this more flexible, accurate kind of insurance has been being able to get data regularly at a reasonable cost to adjust the premium.
The value of data could facilitate the move to variable insurance
Today, with many small- and medium-sized businesses getting key services from core sets of service vendors and many machine companies collecting regular usage information from their customers, we can rethink the insurance cycle.
Instead of episodic annual sales, once we are connected with a customer, we can enable data sharing with core providers to share information instantly and adjust the insurance coverage from a fixed to a variable cost.
It isn’t like this model is completely foreign today. Health and employee benefit providers often use variable billing thanks to their connections to payroll or accounting. We have seen P&C do the same with new models like Lyft, where the ride-share company is authorized to share usage data with the insurance carriers so they can calculate the split between personal and commercial usage.
Variable insurance tends to be more attractive in volatile economic times like these. Carriers don’t need to exclusively offer variable insurance, but we should expect that more customers will be interested in opportunities to move fixed costs to variable and drive usage of their various providers including insurance.
There is an opportunity here for insurance leaders to carve out new markets for variable style insurance and drive growth. It just takes vision and commitment to move beyond the insurance model of yesteryear. If you are interested in exploring this further, let us know.