Car Subscription Services Designed for Evolving Consumer Needs

As the North American International Auto Show kicks off next week in Detroit, one of the more talked about trends in the automotive industry is the growth in interest and investment in vehicle subscription services.

These services are considered the “Netflix model of vehicle ownership and usage:” consumers pay anywhere from a few hundred dollars to more than $1,000 for a monthly subscription that allows them to try out a different car every month. The subscriptions generally include the cost of the vehicle’s maintenance, roadside assistance, warranties and insurance.

Car subscription services provide an alternative to traditional car leasing and buying and make sense in this growing “subscription” economy, in which consumers are increasingly signing up for services that allow them to try out, on a weekly or monthly basis, everything from clothing to coffee to dog treats.

When offering car subscriptions, companies like Carma and Flexdrive, along with automotive dealerships and OEMs, need a customized insurance package to cover the typical liabilities of car ownership as well as the unique liabilities of the subscription model or “sharing” aspect, said Adrian Smith, Managing Director, Burns & Wilcox Brokerage.

“It’s something the insurance community will need to pay attention to,” Smith said. “With all these high-tech platforms, exposure is divided into segments, and the challenge is insuring different parties during the time when they are responsible for the vehicle.”

Market for car subscriptions uncertain

Vehicle subscription services are available through technology firms, large dealership groups, car rental companies and ride-share companies. Perhaps the most established subscription services are through automotive OEMs such as Porsche, Mercedes-Benz, Volvo and BMW.

The appetite for these services is still uncertain. One estimate suggests that they could account for nearly 10 percent of all new vehicle sales in the United States and Europe by 2025-26. Flexdrive, which offers its subscribers the option of a Chevrolet Camaro, Ford Mustang or Honda CR-V for a subscription starting at $900 a month, for instance, has reported that it adds between 600 and 800 new vehicles subscribers each month.

“Carriers have an obligation to provide insurance that meets the needs of the evolving marketplace.” – Adrian Smith, Burns & Wilcox Brokerage

Tracking these statistics is important because the forecast for these services can help define Auto Liability and Collison options and costs, Smith said.

“The insurance policies we have are based on specific exposures,” Smith said. “Carriers have an obligation to provide insurance that meets the needs of the evolving marketplace.”

Operators of these subscription services need to make it clear to consumers at what point the driver or “subscriber” is covered, Smith said.

“You can’t legally operate a vehicle without insurance or financial responsibility, so you need the insurance aspect clear for your consumers,” said Iain Boyer, Chief Underwriting Officer at Y-Risk, an underwriter specializing in insurance products for the sharing and on-demand economy, including vehicles.

At the most basic level, operators in this segment need to understand when they need to provide insurance and when they don’t, Boyer said. This is important because millennials are expected to purchase fewer vehicles for a variety of reasons while they continue to embrace new forms of technology.

“The old way of providing insurance in this area doesn’t quite fit,” Boyer said. “After the Financial Crisis, the model for how many consumers make purchase decisions changed because of shifting attitudes toward asset ownership and long-term debt.”

“The old way of providing insurance in this area doesn’t quite fit.” – Iain Boyer, Y-Risk

The model is attractive to anyone who desires a high level of flexibility without the overhead and up-front debt that comes with purchasing or leasing, Boyer said. Consumers may or may not spend more money on a car subscription service versus purchasing or leasing depending on usage, but the convenience, lack of negotiating needed during a purchase process, and lack of a long-term commitment are all benefits.

Industry will mature further with the help of vehicle-based telematics

As the vehicle subscription industry matures, telematics will help determine everything from insurance options and costs to whether a consumer’s driving record qualifies them to use a service, Smith said. Data gathered from vehicles is already happening and will only grow in the years ahead. This data is generally transmitted to a cloud-based platform to measure how the car is being driven.

Even data such as facial recognition and other in-vehicle securing devices can help develop the insurance market for vehicle subscription services, which essentially serve as a fleet for the operator, Smith said. Flexdrive has already used telematics to predict depreciation and set prices for its subscription fees. “It can allow the insurance market to establish age or driving record restrictions and changes can be made to an agreement based on the speed a (subscription service) vehicle is driven.”

“Even data such as facial recognition and other in-vehicle securing devices can help develop the insurance market for vehicle subscription services” – Adrian Smith, Burns & Wilcox Brokerage

In essence, the more data that is available on how a vehicle is being driven, the more specific insurance products can become.

“Telematics is an important part of the puzzle,” Smith said.

Insurance options will continue to evolve

The global on-demand transportation industry, which includes ride-sharing services like Uber and Lyft, is expected to reach nearly $305 billion by 2025, according to a study conducted by Grand View Research, Inc. Many consumers continue to purchase on-demand ride sharing vehicle services that also include e-hailing and station-based mobility or carpooling as an alternative to both subscription services and buying and leasing.

In addition Lyft began offering its “All-Access Plan” in October that allows consumers to pay a monthly fee that includes a set price for 30 trips priced at $15 or less.  Vehicles are also the basis of delivery services (i.e. Uber Eats and Grubhub) as well as on-demand valet services. Investments in companies providing these services continue to pour in. San Francisco-based Getaround is a peer-to-peer process where car owners can rent out their vehicles to others. Its recent funding topped $103 million.

Because of these options, prognosticators suggest that vehicle ownership in the U.S. will decrease in the coming years.

As a result of this expected decrease, dealerships are interested in exploring car subscriptions services. Smith said these services require a significant up-front investment, which will force many dealers to make a decision on whether to pursue this new business area. Either way, any company offering vehicle subscription services should speak with a broker or agent to ensure the right coverage is in place, he said.

“Things are changing rapidly in this field so you want to speak with an expert who can give you the latest information on policies you need,” Smith said. “I think we’re all interested in learning where this industry will head in the coming years.”

As with any coverage need, an insurance broker or agent must be consulted. Click here to forward this article to your insurance broker or agent to ask if you need this coverage, or share this with clients to start the conversation and ensure proper protection.

This information was provided by Burns & Wilcox, North America’s leading wholesale insurance broker and underwriting manager. Burns & Wilcox works exclusively with retail insurance brokers and agents to assist clients like you with their specialty insurance needs. Ask your insurance broker or agent about a customized Auto Liability or Collision policy for vehicles involved in on-demand or subscription-based services.