SUBSCRIPTION INSURANCE

It’s intriguing, but not a serious threat

By Joseph S. Harrington, CPCU

Welcome to “subscription culture,” where consumers expect to be able to order what they want, when they want it, in whatever quantity they want, for as long as they want.

Subscription culture is perhaps best exemplified by the “streaming services” that provide television programs and internet content to individuals who select them on a fee-for-service basis. Subscription sales extend to a growing range of commodities, however, including food service and transportation.

And also, apparently, to insurance.

Aviva made a splash in late 2018 by introducing home and auto subscription policies that allow policyholders to “change their cover[age] as often as they want without incurring charges.” About a year into the program, Aviva’s CEO was quoted as saying the “AvivaPlus” initiative was “reasonably successful” with a total of 250,000 subscribers.

About a year later, the U.K.-based financial giant HSBC released its “Select and Cover” program, which allows households to select from among seven coverage options for one monthly premium. Policyholders can select three to seven options, with the right to add or change one of them a year, as long as they maintain at least three of them. Coverage can be canceled at any time for no additional charge.

The point here is not to suppress innovation by scavenging the imagination for scary but unlikely scenarios … (but) to underscore that insurance is generally not a thing that one buys and uses at a certain point in time, like a streaming service.

To date, no major U.S. carrier has announced a subscription insurance program, at least for the types of coverage traditionally sold by agents and brokers, even though research by EY NextWave Consumer Financial Services finds that 51% of U.S. consumers aged 35-49 are interested in subscription insurance.

On again, off again

The essential idea behind subscription insurance is that consumers will be empowered to purchase only the coverage they need at the times they need it.

New forms of travel insurance provide a good illustration of how the concept works in practice. While regular travelers may wish to have coverage in place year-round for lost luggage, flight cancellation expenses, and other unexpected travel costs, occasional travelers may prefer to activate coverage only when they are actually away from home. Subscription travel policies allow them to do that.

In a January 2021 EY report on subscription insurance, Penney Frohling, a specialist in financial services for Ernst & Young LLP, writes that subscription policies can let insureds “turn on and turn off coverages and features as easily as they might a streaming service.” For example, a digitally enabled subscription policy might allow an insured, on their own, to add or remove family members from personal lines policies or locations to commercial policies.

“We expect subscription models to steadily gain traction in the years to come,” Frohling writes, adding that “experiences of other industries confirm that the growth of subscription models in insurance is inevitable.”

Whatever the experiences in other industries, nothing is inevitable in insurance. The history of this business is filled with hot topics that cooled off, for good reason. Subscription insurance will have to overcome some inherent limitations before it becomes a mainstream practice in major lines.

Not entirely new

First off, the core benefits of subscription insurance are not entirely new. Insureds have long had the ability to cancel and change coverage; they simply had to contact an agent or carrier to do so, and possibly pay a fee. They could not, as a practical matter, suspend and revive coverage at will, but very few insurers would have wanted to assume anyone’s risk on such a basis.

The ease of digital technology, therefore, does not change the nature of insurance as much as it allows insurance to be more efficiently applied to smaller exposures, such as travel plans, or the occasional use of a car by someone who opts not to own one. In lines where exposures last indefinitely, the economic benefits of subscription insurance have yet to be convincingly demonstrated.

For example, there would be no purpose for a “subscription” to a claims-made policy (D&O, E&O, etc.), since the entire point of claims-made insurance is to have coverage in place when a claim comes in, whether it’s expected or not.

Similarly, an insured would be playing with fire (or wind, or vandalism) if they tried to time coverage for different property perils, presuming that lenders or other stakeholders would even allow it. Even if one were to “turn off” their “weight of snow and ice” coverage from June through August, how would that complicate a loss-of-use claim resulting from winter storm damage somewhere else?

Holes in a backstop

Personal auto and homeowners policies are seen as holding the biggest market potential for subscription insurance, as consumers are perceived to be enthusiastic about subscription services and considerably less so about traditional means for marketing insurance.

Again, it remains to be demonstrated whether the benefits of easily turning coverages on and off will be great enough to justify the risks involved or to displace existing methods for doing so. This is especially so for admitted carriers in the U.S., who must win regulatory approval for policy forms and rates.

For personal auto liability insurance, vehicle telematics has already made it commonplace to have coverage rated according to how much and how well one drives. The purpose of a subscription policy would presumably be to “turn off” auto liability coverage when one is not using an auto for an extended period, such as during a months-long business assignment or military deployment out of the country.

In such a case, one might have zero coverage for zero premium, but not zero exposure. There is still the potential for an odd but severe claim if, say, a vehicle rolls down an incline and strikes a person, or if a child accidentally locks himself in a car and suffers heat stroke. Similarly, insurers have seen liability claims arising from unoccupied residences.

The point here is not to suppress innovation by scavenging the imagination for scary but unlikely scenarios. The point, rather, is to underscore that insurance is generally not a thing that one buys and uses at a certain point in time, like a streaming service. (There are exceptions, of course, such as when a homeowner might choose to temporarily acquire liability insurance for construction work at his residence.)

Insurance is more like a backstop that we depend upon over time to protect ourselves and others. To turn coverage “on and off” is, in effect, to open holes in that backstop; holes that one might forget to close at great cost.