An Allstate (NYSE: ALL) subsidiary called Arity is dedicated to solve an interesting problem. That problem is “how do you sell auto insurance to drivers that do not own cars?”
More importantly, Arity is trying to solve the dilemma of “how does an auto insurer make money when people do not drive or own cars?” After all, the traditional auto insurance model is based on the presumption that everybody will drive and own a vehicle.
The plan at Arity is to move from selling insurance to selling data about drivers, Fortune reported. Along the way, Arity hopes to pioneer a different kind of coverage called “usage-based insurance” or UBI.
Allstate wants to harvest Consumer Data for Profit
This business plan has been successful at some companies including Germany’s Ergoneers GmbH. Ergoneers; which supplies data to automakers such as BMW and General Motors (NYSE: GM) collects and markets driver data. It reportedly has 1,000 business to business customers.
Another company called Opiria is building an Ethereum-based marketplace where consumer data can be sold for the PDATA ERC20 token. Opira was co-founded by Ergoneers’ founder Dr. Christian Lange, who likes to call consumer data “the oil of the 21st Century.” Opiria’s customers include Daimler AG, Volkswagen, and GM.
Moving to a data-driven model is smart because some data based companies such as Alphabet (NASDAQ: GOOG) have been very profitable. Alphabet (NASDAQ: GOOGL) makes most of money from data collected by the Google Search engine.
Not coincidently, Alphabet operated an insurance marketplace in the UK for awhile, and explored the possibility of opening one in the United States. Alphabet’s Google Venture subsidiary has made a number of investments in insurance enterprises such as Lemonade, Insurance Business reported. Alphabet’s interest in insurance and self-driving vehicles indicates the profit potential at Arity and in UBI.
Data Based Insurance
The idea behind UBI is simple; you only pay for coverage when you are actually behind the wheel. The challenges to make UBI a reality are daunting and complex.
For example how can an insurer tell much a person actually drives? Companies have been trying to answer question for years with telematics, and other wireless data-collection devices.
Beyond the amount of driving, there is the length of drives, driving habits, speeds, times of day driven (accidents are more common after dark), and other factors. The idea is to collect accurate real time data about driving so insurers can make informed decisions about insurance.
The data would be collected into a simple driver score similar to a credit score. The driver score, which would reflect a person’s actual driving, would be the basis of insurance rates. A person’s premium would be based on her real driving habits or how much she drives.
That would be a paradigm shift from the present-day business model in which auto-insurers make educated guesses about drivers. Today’s insurers often base premiums on easy to quantify characteristics that have little to do with a person’s actual driving. Examples of questionable criteria used to price policies include age, sex, income, occupation, and students’ grade-point averages.
If it works Arity and Allstate would be able to offer cheaper policies to good drivers regardless of age, sex, income, or occupation. That would reduce administrative costs by eliminating the need for a lot of paperwork.
Arity would also be in a position to sell data to other insurers, auto manufacturers, or transportation providers like Uber. A logical extensive of Arity would be a marketplace like Opiria.
User Based Insurance
The potential market for User-Based Insurance is unknown, currently around 10% of Americans buy such policies, J.D. Power reported.
Possible customers for UBI might include:
- A retired woman who only drives her used Toyota to church and the grocery store.
- The office worker who only drives the two miles between his house and the light-rail station every day.
- A young professional that only drives rental cars on occasional long-distance trips.
- The artist who lives Downtown and only drives her clunker car on occasional trips to the country.
- Or a person who has a second vehicle he only drives occasionally. Such as the guy who keeps the vintage muscle car in his garage for weekend road trips.
Such people are becoming more common in our society. Whether they will form a mass market for insurance is unclear. Even less clear is whether customers will accept the driver score or if insurers will use it.
What is clear is that Arity has not figured out how to make money from UBI or the data score yet. Fortune reported that the company lost $15 million in 2017 but did generate $79 million in revenue.
That proves UBI might not be a viable business yet, because it simply cannot generate the kind of float insurers need to survive. Only time will tell if data collection and short-term policies will be the future of auto insurance.