Vehicle Subscription Leases Bring Challenges for Insurance Industry
The digital economy is changing the way consumers interact with the personal vehicle value chain. The stage is set with declining vehicle ownership, while access to mobility options is increasing.
The World Economic Forum anticipates $90 billion worth of operating profits will migrate from traditional to digital channels open for competition among Original Equipment Manufacturers (OEMs), dealers and third-party platforms.
One such option is vehicle subscription lease — this is the third option in the “buy,” “lease” or “subscribe to” vehicle decision you are now able to make during your visit to a dealership. Drive off the lot with a car and forget about oil changes, maintenance, wear-and-tear or the hassle of a claim should one occur.
Two Types of Vehicle Subscription Leases
Subscription leases come in two basic models: 1) a lease-like model and 2) a swap model. In the lease-like model, a subscriber gets access to a specific vehicle under a limited duration lease. In the swap model, a subscriber drives a car off the dealer lot and when they’re ready to drive something different, they open an app, select a vehicle and swap into that new car.
This can happen two days or two months after starting the lease.
As consumers, many of us covet the convenience of subscription. As insurance professionals, we also recognize the underlying challenges with insurance within the subscription agreement. Questions arise, such as:
- Does coverage trigger when someone other than the subscriber drives the car?
- When the dealership concierge is swapping the car, who is responsible for any resulting liability and physical damage?
- How will a personal umbrella respond to a commercial primary layer?
- Do Graves Amendment protections apply (whereby an owner of a vehicle who leases or rents the vehicle to another person is not held responsible for resulting liability)?
Those questions and many more are being asked by insurance underwriters, regulators and state governments. The result is a patchwork of state reactions to the business model, causing confusion, a lack of uniformity in insurance solutions and — in at least one case — the inability for a platform to operate because the state government has not yet determined how to treat the business model for insurance purposes.
As consumers, many of us covet the convenience of subscription. As insurance professionals, we also recognize the underlying challenges with insurance within the subscription agreement.
Insurance brokers and carriers are working together, often in conjunction with the insureds themselves, to create auto policies that have characteristics of both commercial and personal lines policies.
In the case of commercial lines solutions, the coverage needs to respond and feel like a personal policy in the way a subscriber utilizes the coverage and the concierge-level service at the time of loss. Subscribers drive these vehicles as a personal vehicle and therefore coverages such as “Drive other car” are critical to the success of the business model.
Conversely, personal lines carriers see an opportunity to create a product that can be delivered at the platform level, or risk being disintermediated in the personal vehicle value chain.
Although many dealerships and OEMs are referring to their subscription programs as pilots, many OEMs operating in the United States and around the globe have either entered the market or are rumored to be entering the market in 2019.
We can be confident in that vehicle subscription leases are here to stay, and the insurance industry is working quickly on getting up to speed to ensure all questions are answered. &