The Reality of Creating an Auto Insurance Product


  • Frank Neugebauer
  • Published: 22 July 2019


If you’re an up-and-coming automobile manufacturer (or InsurTech) looking to break into the auto insurance space, you may want to read this. Insurance isn’t like manufacturing; it’s not like retail, it’s not like banking, it’s not like anything else. However, if you know a few things about the industry beforehand, you can save yourself a lot of grief later on.

If I were an automobile manufacturer and wanted to build an insurance product for my cars, it would be (conceptually) straightforward; come up with the unique coverage for my specific type of car and then price accordingly based on the characteristics of my automobile. However, the reality is quite a bit different for some precise reasons:

  • 50 independent departments of insurance regulate insurance – and for some very practical reasons
  • You don’t get to arbitrarily decide what you offer and what you charge, unlike some other industries
  • Insurance isn’t merely about my vehicle – there are other vehicles and coverages (such as physical damage, medical payments, and liability) to consider
  • My new car is an unknown, and in terms of loss history, a biased study isn’t enough to establish the cost of claims – time is required to gain loss history data

Why So Many Departments of Insurance?

Imagine if insurance was regulated like banking through a national agency such as the Securities Exchange Commission (SEC). In Washington, D.C., theoretically, the government is run through the equal and level-headed representation of each state through Congress and The House of Representatives. In practice, that’s not really how it works, and certain large states (by population) have more influence over things. This is a massive problem for insurance – more importantly for insureds – because insurance needs vary tremendously by the state. Take, for example, the automobile hurricane damage coverage needs in Nebraska, Indiana, Michigan, and any other non-hurricane zone state. Similarly, consider how much important snow and earthquake are for rating automobile coverage in Florida. Add to it the actual risk profile for states. How many cars are there in California compared to Montana? How many severe accidents in Maine compared to New York? This is a little like saying the same vehicle model you manufacture is fundamentally different depending on which state you’re in.

Insurance is not a manufactured item that’s used similarly no matter where it’s used. Insurance is protection with specific uses and is highly regulated for very good reason.

And I didn’t even get into the state-specific legislation like the Michigan unlimited personal injury protection coverage. This is like saying that your Michigan car must get 125 miles per gallon on the freeway (but only in the state of Michigan) – go figure it out. Good luck.

Further complicating auto insurance – as compared with manufacturing the automobile – is that you’re literally not just designing your own vehicle. You have to design your auto product around the needs of almost every other car. Insurance isn’t just about damage to your vehicle – it’s about liability and the damage that can happen to other vehicles and people. In the case of liability, your self-driving vehicle may hit a pedestrian by accident or get into an accident with a vehicle that is not the same kind as the one you built your insurance product for. This hinders the value of an automobile-specific product. It’s fine if every car on the road was the same kind as yours – but that’s not reality. Furthermore, you’re not just covering the car – you’re covering the driver. Drivers aren’t manufactured.

Whether you’re building a car or an application to streamline buying insurance, these elements of the insurance industry are critical; it’s not enough to understand the technology. Insurance has a unique regulatory environment, which cannot (and should not) be ignored. If you prepare correctly, your differentiation may very well be in how you adapt to it for your product.

This article was originally published on Property Casualty 360. To read the original article click here.