The insurance industry is at a crossroads. Consumer resentment about insurance affordability and fairness of premiums is brewing. The insurance industry is taking needed action on rates, but insurers find it difficult to inform and educate a customer base that views pricing as opaque and overly complicated.
All of this raises the question: Can adequate premiums and trustworthiness coexist?
Eroding Trust
As consumers grow increasingly skeptical, the industry faces mounting challenges. Recent lawsuits involving individuals’ driving data from connected cars and consumer apps being sold to insurers without clearly informed consent has struck a nerve. Allegations of improper home insurance cancellations based on flawed aerial imagery and related concerns of insurers “spying” on their customers have surfaced. Even more attention has been attracted by the recent reports of non-renewals for many homeowners just before the Los Angeles-area wildfires, generating a mix of angst and wake-up calls. But each of these actions is deemed necessary for carriers to ensure viability, despite the obvious criticism that the decisions lack transparency.
Concern about insurer profitability has been in the forefront as the P&C industry experienced significant underwriting losses over the last three years. Attendant rate increases and tightening underwriting practices are having the desired outcome with, at least, financial recovery in personal auto lines. However, increasing rates are a new reality as climate exposure, repair cost inflation, social inflation, and fragile supply chains persist and costs are passed on via premiums.
Premium Leakage
Premium leakage, a problem fueled by outdated and inaccurate data, continues to contribute to underwriting losses and undermine profitability. Such leakage occurs when insurers are unable to align premiums with the actual risks of their policyholders. This often stems from reliance on stale, incorrect, or incomplete data. The problem doesn’t stop there. After policy inception, specifics like garaging location, undisclosed drivers, vehicle use and mileage can become a moving target. Inaccuracies create a ripple effect—insurers lose revenue, or customers may pay more than they should.
Adding to the complexity is the industry’s reliance on third-party providers that create a snapshot of information based on public records and other sources. Data providers sell information to counteract insurance application shortcomings. Insurers needed another way to size up risk with confidence beyond a short list of application questions and biased responses. These third-party sources, while in standard use, are not real time, can be flawed and can lead to broken feedback loops where errors compound.
In some cases, policyholders’ details are “grandfathered in” from the initial application snapshot without updates for years, further widening the gap between actual risk and premium pricing.
Personalization and Policyholder Engagement for the Win
As the outlook for auto lines improves, competition is intensifying in early 2025 and is expected to stay heated for at least two years. At present, carriers are addressing high shopping rates and seeking to grow market share in the long term. Customer retention has suddenly been reprioritized to the top as carriers see a profitable growth pathway. With the right approach, current conditions can become opportunities to build stronger, more transparent relationships with customers while improving operational efficiency.
Direct engagement with policyholders offers a pathway to address premium leakage and rebuild trust at the same time. By going directly to policyholders and offering them incentives to share their verified information, insurers can ensure accurate, up-to-date information that informs their underwriting decisions. This approach not only improves underwriting decisions and pricing accuracy but also creates a more transparent relationship with customers.
- Gather verified first-party data: Policyholders can directly share critical details, such as real-time mileage and the condition of their vehicles. Unlike with third-party reports, this data is both accurate and timely.
- Address stale or missing data points: Insights into garaging locations, prior vehicle damage, and undisclosed drivers can close significant gaps in risk assessment.
- Enhance customer participation: Encouraging policyholders to share their data while giving them full control fosters engagement and trust. When customers understand that their data directly contributes to fairer pricing, they are more likely to participate willingly.
The foundation of successful engagement and personalization is trust. Many consumers view the insurance industry as opaque and unresponsive, often associating it with unwelcome surprises like non-renewals or claims disputes. To counter this perception, insurers must prioritize transparency.
Imagine receiving a clear message from your insurer: “Here’s why your policy is changing, and here’s how we calculated your rate based on verified data you provided.” Such communication demonstrates fairness and builds confidence. Customers feel valued and empowered, which can translate into long-term loyalty.
Transparency also serves as a deterrent for misrepresentation. For instance, policyholders who understand the importance of accurate garaging information are less likely to provide misleading details, knowing it could affect their claims or coverage down the road.
A Win-Win for Insurers and Policyholders
Personalization and transparency are not just customer-centric strategies; they also drive profitability and operational excellence. By adding personalization and direct engagement with policyholders, insurers can:
- Reduce premium leakage by optimizing pricing accuracy, leading to fairer premiums for all customers
- Reduce friction and administrative costs of handling disputes and errors
- Build a loyal customer base that values engagement and honesty
For policyholders, the benefits are equally compelling. Fair pricing, clearer communication, and the assurance that their data is used responsibly creates a more positive experience. These factors foster trust, making customers more likely to renew their policies and recommend their insurers to others.
Looking Ahead
The year ahead offers a pivotal opportunity for the insurance industry to redefine itself. By prioritizing transparency and personalizing policies, insurers can address premium leakage while restoring trust. Companies that lead with these values will not only strengthen their bottom lines but also reshape the industry’s reputation for the better.
