Growth in U.S. private auto premiums written via the direct channel has outpaced that of the broader industry in recent years, and S&P Global Market Intelligence expects that trend to continue.
The 2019 U.S. Insurtech Market Report includes our historical estimates and five-year projections for the amount of U.S. private auto premiums written directly. Click here to read the full report and to access data exhibits.
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The direct channel, alternately referred to as "direct response," involves selling policies directly to the consumer, including online sales and sales made when a customer calls to obtain a quote and purchases coverage via the call center of that insurer. Direct channel business grew 11.6% in 2018, based on statutory direct premiums written, versus a 6.6% increase for the industry as a whole, driven predominantly by three writers: GEICO Corp. parent Berkshire Hathaway Inc., Progressive Corp. and United Services Automobile Association. Those three combined to make up more than 80% of the total, and each grew faster than the broader industry.
Berkshire Hathaway, which alone made up about 46% of the 2018 total, recorded a nearly 12% jump, which was down from a 15.9% rise in 2017 but on par with the four prior years. The company cited growth in policies-in-force as key to the 2018 increase, as well as rate changes, coverage changes, and changes in state and risk mix.
Berkshire noted in its 2018 annual report, however, that although policies-in-force increased in 2018, the rate of increase slowed, as voluntary auto new business sales decreased 4.7%. Slowing growth is a facet of S&P Global Market Intelligence's outlook for direct response premiums as well. While premiums should outpace the broader industry and continue to make up more of the overall market, they will likely grow at slower rates in the coming years. This forecast is based heavily on S&P Global Market Intelligence's 2019 U.S. Auto Insurance Market Report, which calls for a slowdown in private auto premium growth in the next five years.
The success of the direct response model should be a positive for insurtech companies such as Root Insurance Co., which underwrites its own policies and markets them via its mobile app. Often referred to as full-stack, these companies perform all the functions of a traditional insurance carrier. Root's particular focus is telematics, measuring driving behavior through a customer's smartphone and offering discounts for safe driving.
One of the challenges for full-stack companies is establishing brand recognition, as they look to compete with incumbents. Progressive, for example, spent more than $1 billion on advertising in 2018. Direct response companies typically spend large amounts on ads in order to drive sales, since they do not have agents generating leads. The incumbent insurers also typically have an advantage in that they can bundle policies, offering discounts for customers who purchase another type of insurance in addition to auto. But Root remedied that deficiency Nov. 7, unveiling a renters insurance product that customers can bundle with auto to get a better rate.
The impact of a growing direct channel on another type of insurtech company, the digital agency, will likely be mixed. Digital agencies typically work with incumbent insurers to offer policies online and receive a commission on sales. This model can take many forms, however. One of the more popular types in the private auto space is the comparison shopping platform. Companies like Insurify Inc. help customers choose from a selection of policies to find the most suitable one. On one hand, the comparison sites should benefit if customers are increasingly receptive to buying policies online. But on the other hand, some direct-to-consumer carriers might cut them out of the process completely. The impact will depend largely on the site's ability to preserve its relationships with carriers and the proclivity for customers to shop around rather than remain loyal to their brand.
Additionally, while full-stack insurtech startups tend to be associated with a direct response model, particularly online distribution, some still use agents. Clearcover Inc., which started as a digital agency but formed an underwriting unit in March, plans to use independent agents to market its private auto policies. Metromile Inc., which writes pay-per-mile policies that measure only the amount driven and not driver behavior, uses several comparison sites, including Compare.com Insurance Agency LLC, CoverHound Inc. and the aforementioned Insurify, to market its products.
The 2019 U.S. Insurtech Market Report further explores the dichotomy between tech companies that seek to remove the agent and those that seek to empower the agent.