Customer retention is one of the most important success factors for each and every auto insurance company. It is also a significant pain point for the industry, as 22% of auto insurance customers churn every year and only 2-3% of new customers enter the market. This blog post explores why customer retention is such a difficult challenge for auto insurers and how those companies can improve their customer retention significantly by reducing premium leakage.
The problem of customer retention
The average customer retention rate among personal auto insurance providers in the U.S. amounts to 88%. While this number might seem high compared to other industries, customer retention actually is one of the most important and challenging success factors for auto insurers.
The reason for this is the fact that only 2-3% of new customers enter the personal auto insurance market each year. In order to stay ahead of the competition, insurers don’t only need to acquire customers that are new to the market and convince policyholders to switch over from a competitor’s policy, but most importantly, they need to keep their existing customers happy and engaged. Insurers that focus on business growth rather than retention might be successful at first but will struggle to survive in the long term.
In order to achieve and maintain high customer retention rates, insurers need to know which factors influence their customers’ satisfaction and loyalty. The most important factor is policy pricing. Among policyholders that are looking to switch insurance providers, 64% cite their policy’s price as the primary reason. Offering fair, accurate, and competitive pricing is thus the most important key to improving customer retention rates. Other important factors include a friendly, seamless user experience and a policyholder’s trust in their insurer’s organization.
The solution: reducing premium leakage
Insurers can improve all three of these factors—pricing, the user experience, and trust—by reducing premium leakage with the Smartcar API.
What is premium leakage?
Premium leakage occurs when erroneous underwriting information, such as underreported mileage and misstated garaging locations, leads to inaccurately priced insurance premiums. Premium leakage causes policyholders to pay on $400-700 more on their premiums every year. Personal auto insurers lose $29 billion annually due to the effects of premium leakage.
Apart from causing the industry huge losses, premium leakage is also the largest hurdle on the way to successful customer retention rates. First of all, pricing is the most important factor that determines an insurance company’s customer retention. By reducing premium leakage and achieving more accurate pricing, insurers can improve their customer retention rates significantly. Second of all, reducing premium leakage is about collecting more extensive and accurate underwriting information. If insurers collect this information in a simple and transparent way, they can engage their policyholders and build their trust, which leads to even better customer retention.
Reducing premium leakage with the Smartcar API
Smartcar helps insurers eliminate three of the most common types of premium leakage: underreported mileage, garaging misrepresentation, and invalid VINs.
Underreported mileage occurs when policyholders underestimate or lie about their annual mileage to their insurance provider. Over 50% of drivers underreport their mileage every year, causing insurers $5.4 billion in annual losses.
Garaging misrepresentation occurs when a policyholder reports an incorrect garaging location to their insurer. Over 10% of insurance policies have incorrect garaging locations on file. As policy prices vary between different regions and ZIP codes, policyholders can achieve a 35% cheaper rate just by stating the wrong address. Insurers lose $2.9 billion due to garaging misrepresentation every year.
Invalid VINs are the third type of premium leakage that Smartcar helps insurers eliminate. More than 5% of personal auto insurance policies have an invalid VIN on file, causing insurers to lose $2.1 billion every year. An incorrect VIN can lead to inaccurate underwriting and pricing, or even worse, it can hide that the fact that the vehicle has been reported stolen or is too old to be insured.
Smartcar’s hardware-free API technology allows insurers to instantly and easily eliminate premium leakage from all three of these factors. Policyholders link their vehicle to the insurer’s app with just three clicks from a Smartcar-provided onboarding flow. The insurer then uses Smartcar’s API to automatically retrieve the odometer reading, location, and VIN directly from the vehicle’s instrument cluster.
Improving customer retention
Accurate policy pricing
With their policyholders’ accurate mileage, garaging location, and VIN at hand, insurers can achieve the most accurate and competitive pricing, thus improving their customer retention rates significantly while also preventing millions of dollars in losses every year. But pricing is not the only way in which Smartcar helps insurers boost their customers’ satisfaction and loyalty.
Friendly user experience
Smartcar’s hardware-free solution is easy to use not only for insurers but for their policyholders, too. The only time that a policyholder needs to interact with Smartcar is when linking their car to the insurer’s app. Our user-friendly Smartcar Connect flow makes this step as fast and easy as possible. After onboarding their vehicle, policyholders never need to report their mileage, garaging location, or VIN to their insurer again. Instead, the insurer conveniently retrieves this information directly from the policyholder’s vehicle. This simple user experience helps insurance providers engage with policyholders in a friendly and efficient way, thus keeping customers happy and increasing retention.
Finally, Smartcar’s technology helps insurers achieve even higher customer retention rates by building and maintaining their policyholders’ trust. At Smartcar, we put transparency and vehicle owner privacy first. When linking their car to the insurer’s app through Smartcar Connect, vehicle owners review and consent to the exact list of information (e.g. odometer, location, VIN) that the insurer’s app is requesting access to. This user consent model allows policyholders to keep ownership of their own vehicle information. It encourages them to trust their insurer and become loyal customers.
Customer retention is an important and challenging topic for personal auto insurance providers, but with the right tools in place, insurers can set themselves up for long-term success. Premium leakage contributes significantly to low customer retention rates. Using Smartcar’s API, insurance companies can effectively fight premium leakage, improve customer retention rates, and while doing so, save millions of dollars every year.