The great thing about Google Inc. (NASDAQ: GOOG, GOOGL) from a writer’s or an analyst’s standpoint is that it is constantly entering sectors one would not expect it to be in. The latest industry Google wants to disrupt is auto insurance with its Google Compare service, according to various news reports.
On the surface, Google Compare is a tool that would help customers shop for insurance and compare policies and quotes online. Okay, that does not sound very revolutionary or disruptive, because online search tools for insurance policies have been around for years.
Yet if we dig a little deeper, we’ll see that Google is planning to do a lot more than compare quotes. In January, Forrester analyst Ellen Carney revealed that Google has set up a company called Google Compare Auto Insurance Services Inc., which has been licensed to sell insurance in 26 of the 50 states.
Google Is Creating an Insurance Brokerage
That indicates Google is actually trying to set up an insurance brokerage. For those of you not familiar with the insurance business, a broker is a professional that negotiates with insurance companies on behalf of clients in an attempt to set up tailored or custom coverage for customers.
The difference between a broker and an agent is that an agent has a relationship with a limited number of insurers and often specializes in one kind of coverage, such as life or auto. A broker deals with a wide variety of insurers and often sells a wide variety of coverage.
Carney reported that Google is working with a privately held online San Francisco insurance brokerage called CoverHound. She also thinks that Google could purchase CoverHound Inc. to gain expertise in insurance at some time.
Naturally, many people are wondering why Google would want to operate an insurance brokerage. The reason is simple: insurance brokers make money by charging a commission on each policy they sell. Google’s management thinks that insurance could be another stream of revenue. It wants to charge a commission on insurance much as it charges a commission on advertising.
A Lucrative Online Marketplace for Insurance
It looks as if Google is trying to create an online marketplace for insurance. Google’s marketplace would sell policies provided by insurers and charge a commission much like Amazon.com Inc. (NASDAQ: AMZN) charges a commission on third party sales. The cash generated by such transactions can be huge; VentureBeat estimated the value of Amazon’s third party sales for 2013 at $17 billion.
What is interesting is that insurance is one of the few products that Amazon.com does not sell. Google is entering one of the few sectors that Amazon has stayed away from. It is also entering a sector in which third party sales could be extremely lucrative if you judge by revenue numbers.
- IBIS World estimated the total revenue of the U.S. auto insurance industry at $220 billion.
- The largest U.S. vehicle insurer, State Farm, generated $64.3 billion in revenue just from its auto insurance business, according to visualy.
- The second largest U.S. automobile insurer, MetLife (NYSE: MET), earned a revenue of $52.717 billion from its vehicle policies.
- Three other insurers, Liberty Mutual, Allstate (NYSE: ALL), and Nationwide, reported auto insurance revenues that exceeded $30 billion a year.
Google is interested in auto insurance because it is a very lucrative business. The problem is that vehicle insurance is a heavily regulated and very complex business. Contrary to popular belief, the major factor that determines auto insurance rates in the U.S. is state laws. Michigan has some of the nation’s highest insurance rates because of its regulatory structure.
The Auto Insurance Marketplace Is Highly Inefficient
That means Google may not be able to set insurance rates in the same way it determines advertising costs. Yet there is evidence that there could be a demand for such a marketplace. Analysis has determined that premiums for identical policies can vary widely within the same state or region.
A 2014 study from Insurance Quotes.com indicated that quotes for the same policy for a Los Angeles couple varied by as much as 33%. The same study found that premiums varied by as much as 50% between regions of California.
Quotes for identical auto coverage on the same car for a 34-year-old man with a good driving record that lived in Spartanburg, South Carolina, varied dramatically, an earlier Insurance Quotes survey found. The difference between the highest and lowest quotes was $670.
That indicates the present insurance market is highly inefficient, much like the advertising market before Google entered it. One of Google’s specialties is to identify inefficient markets and offer a cheaper and more efficient alternative to traditional business practices. If Google could make auto insurance more efficient, it could generate significant streams of revenue if it could get around state regulators.
Google’s expertise at data analysis and collection could be what makes the auto insurance market more efficient. For example, if Google could come up with a solution that accurately matched drivers with policies or a means of providing insurers with a clear picture of customers’ driving habits, it might be able to offer lower rates.
Googles’ Data Expertise Could Lower Premiums
One reason why the auto insurance market is so inefficient is that insurers lack accurate data about most customers’ driving habits. The only information about most drivers’ behavior is the state driving record, which only includes tickets and accident reports; that data, of course, is extremely limited. That is why so many of them use criteria totally unrelated to driving, like credit scores and grade point averages, when they set rates.
If Google could analyze individual driving habits and tailor insurance quotes to them, it could offer people in states without no-fault insurance significantly lower rates and dominate the industry. Google could do this with next generation data collection or telematics devices that monitor the habits of individual drivers connected to its wireless network.
Some insurers, like Progressive and Allstate, are already experimenting with this technology. Drivers that install the device on their vehicle are given a discount because they can prove they are safe drivers.
Google will also have to convince established insurance giants like Allstate and Berkshire Hathaway’s (BRK.A) GEICO to use its exchange. Carney reported that only one of the major auto insurers, MetLife, was mentioned in Google’s insurance plans. The other policies available were from smaller regional providers. Although, some of the big names, including Progressive (NYSE: PGR), The Travelers (NYSE: TRV), and the Hartford, are available through CoverHound.
It looks as if Google is poised to disrupt the world of auto insurance. One has to wonder if it could really change that industry or not.