The issue of this COVID -19 global pandemic has opened the eyes for most individuals the importance of technology adoption. And for many customers, on-demand insurance is an appealing proposition, providing convenience through an attractive customer interface, and offering the flexibility of cover. Customers can feel confident that they have the protection they need, while only paying when that coverage is required. Sensors and other telematics devices, combined with powerful machine learning algorithms, are already making the process more compelling than ever before.

What needs to be understood, however, is the number of customers likely to gravitate to this model and whether they could form the majority. While ‘as-needed’ coverage is convenient and available at a better price, the per-item or per-use rates would be significantly higher than an annual policy for those with wider needs or for those whose usage behaviors indicate higher risk profiles.

As a result, regular travelers, high-mileage drivers, and others could end up not only paying more but needing to deal with the burden of “insurance management”. On-demand insurance will offer better value for many customers but will mean higher costs for others. Although it would arguably lead to fairer risk distribution, it could also lead to some existing customers avoiding the switch to ‘on-demand’ or ‘usage-based’ in fear of revealing their poor risk profiles and becoming ‘uninsurable’.

On-demand insurers will need to get noticed

On-demand insurers and InsurTech companies, in general, have not lacked press coverage over the last couple of years. Fuelled by the expectations of the upcoming insurance market disruption, they have attracted positive attention from investors and potential customers alike.

The on-demand model will need to convince customers to switch away from using online aggregators to downloading an app from an unproven provider offering a new model. This conversion will not be easy, although as demonstrated by iTunes, Netflix, and many other players across industries, not impossible.

Lack of widespread customer awareness, therefore, presents a key barrier to “on-demand” adoption and mainstream success. On-demand insurance will not succeed in the wider market if customers aren’t aware of its existence or don’t understand how it works. While word of mouth, social media, and other marketing techniques can help increase awareness, conventional advertising is likely to be a key part of any insurer’s marketing strategy — and the experience of price comparison websites suggests that this wouldn’t be cheap. Investment in marketing, particularly in costly advertising is, therefore, critical to breaking into the mainstream.

The financial model will need to work for insurers

For on-demand insurance to go mainstream, the economics of the model has to work for the insurer. The typical model of an on-demand offering is quite simple — the per-use rate is higher than it would be in case of an annual policy, giving the insurer a higher profit margin. On the other hand, if not frequently used, the overall price would be substantially lower than for an annual policy.

From the insurer’s perspective, there are a few challenges. Firstly, there is the increased risk exposure. With the ability to turn insurance coverage on and off as required, some customers may be incentivized to exploit the on demand-model, only switching on their insurance when they want to make a claim, creating fraud risks. Insurers can, however, increasingly use technology and novel business models, such as Lemonade’s no-underwriting-profit approach, to mitigate this.

Secondly, premiums for coverage used only occasionally mean that the customer is paying less overall. Per unit of premium, the insurer may need to reserve more capital than they would require for an incumbent product to cover the additional risk factors, which could exacerbate the lower profit. There is then the question of scale: how many insurers can design and run a full insurance business based on a model with lower premium size, higher risks, and lower overall profit?

Disruption on the horizon?

So how will this play out? First, if we define ‘going mainstream’ as ‘taking close to 50% of the market’, we do not expect that to happen over the next 5 years. Some of the new on-demand providers may become successful in specific product lines or geographies, but it will likely take more time to shake the status quo of the aggregator and broker dominated personal lines market and the more sophisticated and conservative commercial insurance market.

Incumbents will no doubt react to these trends, albeit sometimes half-heartedly due to skepticism about the economics of the model and the expected challenges of transitioning from legacy systems, processes, and people. These conversions will require both time and financial investments, suggesting that mainstream insurers may struggle to adapt, handing an advantage to their digital challenger counterparts. Challenger insurers are likely to more quickly iterate their product offerings and test market readiness, allowing them to create more superior, robust on-demand options. Incumbents may seek to replicate this model by setting up their on-demand offerings in spin-offs outside the core business.

While on-demand insurance may not become the default offering for all insurance types in the next few years, it will become an increasingly important insurance model. We can expect challenges to grow notable market shares of up to 5–10% in their chosen lines of business, and, therefore, not only provide a healthy return on investment for their investors but also create a springboard for even more significant impact in later years.

Inmediate is an insurtech startup from Singapore that is using the latest technology such as Artificial intelligence, Distributed Ledger, and NLP, making insurance processing fast, cheap, and flexible. That gives for better processes, lower costs, improved time to market, and new revenue opportunities.