Digital insurance companies strive to meet customers where they are by simplifying the insurance process, increasing pricing transparency, and (ideally) lowering premiums along the way. However, an online-only insurance company won’t necessarily be the right choice for everyone. Here, we’ll explore the why and how of digital insurance companies, and help you figure out whether it’s time to make the switch to a tech-first insurer.
Overview: Digital Insurance Pros and Cons
Pros
- Can be cheaper than traditional insurance, depending on your circumstances
- Shopping and buying online is often faster and more convenient
- Services and pricing tend to be more transparent
Cons
- Policy and coverage options are often limited compared to traditional insurers
- Usually only available in select states
- Customers lose the option of face-to-face customer service
What Is a Digital Insurance Company?
“Digital insurance” is a loose term. As a rule of thumb, it describes any company using a technology-first business model to sell and manage insurance policies. These providers generally differentiate themselves from traditional insurers in a few key ways:
- You can research, compare, and purchase insurance online or through an app without having to speak directly to an agent in person or over the phone
- The pricing, risk evaluation, and/or claims handling are based on insurtech (new insurance-specific technology)
- Coverage options are simplified to cater to individuals or families with less robust insurance needs
That said, the actual technology and process behind digital insurance varies widely by company and by type of insurance.
How Do Digital Insurance Companies Work?
Digital insurance manifests itself in various ways across the industry. After all, insurtech designed to evaluate disaster risk for home insurance is naturally different from technology that can assess your current and future health for life insurance.
Digital auto insurance companies
Among those variations on digital insurance, people tend to be most familiar with insurtech for car insurance. For example, big-name providers like Progressive, State Farm, and Allstate have been using tracking devices for a number of years as a way to give discounts. They’ll cut rates for drivers whose trackers prove they obey speed limits, brake gently, stay in their lane, and generally drive safely.
Taking that trend a step further are companies like Root, which determine customers’ rates almost entirely based on their driving habits. The safer you drive (according to your cell phone’s tracking data), the lower your prices. Also, as a true digital insurer, Root doesn’t operate any physical offices. Instead it sells insurance and handles claims exclusively through its mobile app.
Similar to Root is Metromile — though instead of focusing on driving habits, this company sets rates based on the number of miles you drive. This type of insurance is geared towards city-dwellers and weekend warriors who drive less frequently and only really need coverage for the occasional excursion. For low mileage drivers, it could be significantly cheaper than a standard insurance policy.
Digital home insurance companies
Of course, usage-based pricing wouldn’t work for something like homeowners or renters insurance. In that industry, new companies tend to focus on simplifying the shopping process and easing customer pain points.
For example, Lemonade Insurance Co. has zeroed in on the high cost of home insurance — a particular woe for homeowners that pay premiums every month and never end up filing a claim. Using an online peer-to-peer model, Lemonade insures groups of similar homeowners by backing their claims with one another’s premiums. The company then takes 20% off the top to cover operating costs, and donates leftover premium payments to a charity of your choice. Transparency? Check.
Bigger home insurance companies are also beginning to leverage insurtech, but in a slower and more cautious way. American Family, for one, plans to offer a smart-home based insurance program that could help homeowners identify issues and fix them before claims ever happen. However, it’s only being rolled out in two states (Arizona and Washington) in late 2019, with no definite plans to expand until the program has been thoroughly vetted.
Digital life insurance companies
Perhaps the most controversial use of insurtech to date is in the life insurance sector. This is where we see big data coming into the picture, as companies accumulate more and more information about customers in order to more accurately pin down their “risk level” and set prices accordingly.
This is especially true when it comes to no-exam or “simplified underwriting” life insurance. These types of policies — which can be purchased online in minutes and allow customers to skip the health exam — have traditionally been more expensive than others, as insurers were working with a limited amount of health information. But with access to personal information through online databases and better risk prediction technology, companies are beginning to offer no-exam insurance on a wider scale and often at lower rates.
However, the implications of data use in life insurance have given come customers pause. The potential inclusion of data from social media, online browsing, purchase histories, and other “personal” sources might mean cheaper and easier access to insurance, but raises many of the same privacy questions the tech industry has been contending with in recent years.
Is Digital Insurance Right for You?
In many cases, a cheaper and more streamlined insurance product is good news for shoppers. For example, usage-based auto insurance could save safe and low-mileage drivers a huge amount in monthly premiums compared to a traditional insurer. Plus, the move toward online and app-based policy management by digital insurers caters toward a growing expectation for better, easier interactions.
However, digital insurers still have a long way to go before they can sweep the industry as a whole. At the moment, they’re primarily small, start-up style companies limited in scope and availability. Lemonade, for example, is only available in 22 states and D.C.; car insurance company Root writes policies in 25 states; and Metromile operates in just eight.
And as for the insurance itself? Policies available from digital insurers tend to offer barebones coverage with few options for customization. Take life insurance company Thread: It sells only basic term life policies without the variety of riders and permanent coverage offered by bigger life insurance providers.
Similarly, Lemonade sells standard homeowners and renters insurance, with just one add-on option: you can buy extended coverage for expensive personal belongings like art and jewelry. That means people with specialized insurance needs (like coverage for earthquakes, green homes, home businesses, watercraft, etc.) won’t find all the protection they need with a company like Lemonade.
The other thing worth noting about digital insurers is that they often don’t operate any physical locations, instead handling all services online or through a mobile app. That means it can be harder to get face time with an agent to actually talk through your insurance needs in-person. Digital companies strive to replace those traditional resources with more robust online learning materials, FAQs, and clearer language in general — but if you place a high value on human interaction when it comes to your finances, a tech-based company might not be your best option.
Overall, digital insurance companies tend to be best for customers with minimal insurance needs: low-mileage drivers, people with standard, non-specialized homes, and young families with basic life insurance requirements. As your coverage needs become more robust — because you have a bigger, more elaborate home, or a growing financial portfolio, for example — it’s worth looking into a traditional insurer with more extensive offerings.
And remember: Digital insurer or no, it’s crucial to compare quotes before buying any kind of insurance. Every company will offer a different rate on the coverage you need, and the only way to find the lowest price is by collecting and comparing multiple estimates.
The “Why” Behind Digital Insurance
Digitization has swept the financial industry in recent years. Take banking, for example. Once upon a time you had to walk into a physical bank and sit down with an advisor before opening an account. Now you can hop on your computer and set up checking and savings at an online bank within minutes, without having to step foot outside the house. In fact, most online banks don’t operate any physical locations at all.
Services like this are popular for their accessibility — being almost exclusively online or app-based — and a promise of better value. By cutting overhead costs like rent and personnel, digital-first companies can often offer lower rates and better returns than their brick-and-mortar counterparts.
Insurance has been a little slower to catch up on the digitization trend. Although most companies have functional websites, online claims filing, and other web-based resources, the majority of policies are still sold over the phone or in person, and risk evaluation is still managed by human underwriters. In fact, recent data puts online insurance purchases at less than a third for life insurance (LIMRA, 2018) and around a quarter for auto insurance (J.D. Power, 2016), with just 17% of home insurance customers comparing quotes online (III, 2016).
However, the percentage of customers buying insurance online (and willing to offer up more personal data to do so) will likely continue to grow. A 2015 Gallup poll found that millennials are more than twice as likely to buy insurance online as older customers (27% vs. 11%), and as the internet generation comes into their financial own, that number should rise.
In terms of insurtech and digital insurance, that online buying trend is key. Customers who prefer researching and purchasing online tend to be more tech-oriented and, by extension, more comfortable with emerging technology and data usage. That’s opened a window for companies to test out tech-based programs that promise to lower rates by using third-party data and/or personal tracking for more accurate risk evaluation.
Whether these smaller, insurtech-based companies will eventually undercut insurance giants like State Farm and Progressive, or whether those companies will begin racing to catch up, remains to be seen. For now, though, they offer a compelling service for customers whose needs fit the bill.
Further Reading on Insurance and Technology
About the Authors
Maggie is a former lead insurance editor at Reviews.com. She's written more than 70 insurance articles covering homeowners, auto, life, motorcycle, travel, and more.