Demystifying insurance: How technology can boost portability and reduce group rates

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Insurance as an industry is always in flux, but given the recent upheaval facing every sector due to COVID-19, some methods considered ‘standard’ may not be agile enough to keep up with a changing world. The current or ‘old’ insurance model could burn itself out, but luckily, a newer model enabled by advanced technology has the potential to position all parties as winners—whether you’re a broker, an independent contractor (IC) or a company that relies on both.

However, insurance is a complex world, so let’s first explore the old model. Previously, carriers extended insurance to companies to help reduce liability, and those companies decide whether to insure workers directly—or, in the case of ICs, require them to purchase their own insurance.

Sometimes ICs can get a group rate to save on premiums, but often they are forced to buy multiple policies if they work for multiple companies. The main benefit here is for the contracting company, which ostensibly gets the peace of mind that comes with knowing the costs are covered if the IC has an accident, cargo gets damaged or something else goes wrong. This model, however, faces a major speedbump; bad actors.

Bad actors: Not just in B movies

Despite the name, bad actors aren’t necessarily bad people. They are, however, individuals who perhaps made a bad decision in the moment that could jeopardize not only their work but also the companies they work with (and other insured ICs). How? With the current model, bad actors’ decisions affect everyone’s insurance rates and coverage.

An example of a bad actor is a worker who isn’t driving as safely as they should be while working, or who perhaps isn’t paying close attention while setting up a delivered item for a customer. Additionally, companies that contract with ICs can also create adverse effects by requiring contractors to get insurance but not actively monitoring or enforcing the act of obtaining or maintaining coverage. This means an IC can get the insurance, then save a few bucks by letting it lapse or by acquiring insurance just for themselves without revealing that they work with various subcontractors.

How does this increase insurance rates for everyone? When a policy pays out for an IC who has done this—and dealt with the possible ensuing misclassification claim—the premiums for that entire group go up. Each time this happens, the policy becomes less comprehensive and affordable, incentivizing good actors to become bad actors rather than pay higher premiums for less coverage. When this happens, the pool decreases but the insurance carrier still has to pay out, both of which cause premium rates to spike further. Rinse, repeat.

Luckily, there’s a way out of this cycle that won’t overturn the entire industry.

A better model: Performance-based pricing

The ‘new’ or emerging model is primarily founded on principles such as ICs buying their own individual policies and contracting companies enforcing them by, for example, not working with anyone who doesn’t have an approved occupational accident policy, or whatever other insurance is needed to perform the work. With the right enablement platform, this can allow ICs to pay for one policy while working for multiple companies, the advantages of which are numerous for both parties, but there’s another way technology can reduce rates: by enabling performance-based pricing through advanced telematics.

Though it has only entered the public conversation recently, telematics technology—sometimes called fleet vehicle tracking—has been around in the transportation industry, in some form, since the ’70s. These systems deliver information to the end user regarding vehicle location, but more important for insurance purposes, they report how the vehicles are being driven.

Take texting while driving, which is a growing issue. There isn’t a national standard for dealing with this behavior; some states don’t even consider it a moving violation, which means a motor vehicle record could conceivably come back clean despite the driver having numerous tickets for texting while driving. With telematics, a swerving driver will show up in the metrics, and that can inform a score that employers or contracting companies can use to determine which drivers they will or will not work with in the future.

This may sound punitive for ICs, but it really isn’t: A positive telematics score can mean lower insurance rates, and it can mean finding more business opportunities with contracting companies who require such a score. This is an incentive to not only drive safely to save money on premiums, but to secure increasingly higher paying jobs as telemetric scores improve.

Companies can lower their own insurance rates the same way and ensure high-quality drivers by screening out ICs with ratings at a certain level (or not working with them again until scores improve). Even then, if the IC has their own policy and their individual score drops or they have to make a claim, only they bear the financial burden.

So what’s the catch? Contracting companies that use telematics as part of the bid process should be cautious with how they apply the data. Active monitoring of the daily scores can be viewed as controlling; addressing a dip in the score can be viewed as directional. These are activities that are very acceptable for an employee driver, but not so much with a contracted driver. A much more defensible manner to take advantage of the telemetric score is to simply decide what an acceptable score is, and contractually require that the minimum score be maintained, or the contractor may be found in breach of contract.

The mutual benefit: A better road forward

The ways this new model benefits all parties, then, start to become clear:

Portability: ICs gain ownership over their own policies, giving them incentive to maintain it, so they can work for multiple contracting companies—assuming they have a third-party platform to enable that portability for approved companies. This gives numerous advantages to ICs, and contracting companies gain an impetus to work with them, because they don’t have to worry about essential coverages. These individual ICs are already vetted and monitored through the third-party platform.

Individual cost burdens: ICs carrying their own insurance policies do not have a negative impact on other contractors or companies if the worst happens. Instead, that individual gets the assistance they need when they make a claim. The situation is addressed by their carrier, and everyone holding a similar policy who hasn’t had an accident pays their usual rate the next day.

Performance-based rates: Basing insurance rates on contractor performance means that careful driving has additional benefits on top of the safety factor; Lower rates for careful drivers backed by actual numbers to reinforce what constitutes careful, and creates a standard for contracting companies to keep the best and safest drivers on speed-dial.

The world is changing, but that’s not the only reason to leave the old model behind. As rates continue to rise and policy participation shrinks, that model will continue to struggle, but it’s bound to stick around for a while longer at least.

The real reason to look toward the future instead—and to find an insurtech partner who’s doing the same—is that the world is fast becoming a place where the new model is set to simply happen anyway. In this future, ICs and companies alike can get the coverages they need at better prices with fewer hassles. Trying to cling to past methods rather than embracing these new standards is going to end up just like texting and driving: unsafe for everyone on the road.

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