Car as a service: How can the insurance industry adapt?

In recent years, the subscription model has transformed how we consume media. Platforms like Netflix and Spotify have all but replaced DVDs and MP3s.

Now, this model is steering its way into the motoring world. Cars have traditionally represented freedom and personal ownership. But there's a growing trend towards car subscription services and car clubs, which focus a lot more on freedom and flexibility.

This evolution to Car as a Service (CaaS) offers more convenience and flexibility than traditional finance options, though often at a much higher cost.

In this piece, I'm going to dive deeper to explore CaaS and its potential impact on the insurance industry.

What is Car as a Service?

CaaS is a model that offers flexible car access without the need for ownership. At its most basic form, short-term car rentals are CaaS - but they aren't designed for day-to-day driving.

Here are the most popular types of CaaS:

Pay-as-you-go car clubs

Car clubs - also known as car sharing clubs - are services where companies provide cars that can be rented for short periods. These are typically charged by the hour or day, including the costs of fuel up to a certain limit. These clubs often let you book the cars through a mobile app.

Car clubs exemplify the adaptability of CaaS. In many cities, cars are easily accessible, and you can book and unlock a car through an app. These bookings usually include fuel costs for up to 60 miles. Companies like CarZip, Co-wheels, Turo, Bold and Zipcar are the most well-known car clubs. This option might be great for those who only need a vehicle sporadically throughout the week.

Subscription car services

Car subscriptions are for those who value the convenience of driving without having to buy a car. For a monthly fee, subscribers get a new car, with regular maintenance, insurance, and car tax costs covered. Unlike traditional leases, which last a year or more, these services offer the flexibility to cancel or change vehicles with just a few months' notice.

Salary sacrifice schemes

Under this type of program, employees can allocate a portion of their pre-tax salary for a non-cash benefit, such as a car. These schemes can lead to tax and National Insurance savings for the employee and employer. Many of these schemes operate through lease agreements that also include maintenance, insurance and breakdown cover.

What makes CaaS unique?

In the past, most drivers leaned towards traditional car financing methods centred around ownership. Hire Purchase (HP) catered to those keen to own a vehicle. More recently, Personal Contract Purchase (PCP) has been favoured for its flexibility, letting drivers decide between owning or returning the car after completing their contract term.

What sets CaaS apart is its unrivalled level of convenience without the responsibility that comes with ownership. Take car clubs for instance. They provide urban drivers with on-demand access to cars without the troubles of securing parking permits, MOTs, or sorting out their car tax. The driver enjoys all the benefits of having a car at their disposal without any of the ownership hassles.

Car subscription services offer a similar experience. Instead of just leasing the car itself, subscribers get a comprehensive package covering everything they need to get on the road. This includes maintenance, insurance and car tax. They also don't require long-term commitment. For example, Volvo lets subscribers switch vehicles or terminate their full service with just 3 months' notice.

However, the enhanced convenience and flexibility of CaaS comes with additional costs. Choosing a car subscription can be significantly more expensive than buying a car and insurance yourself.

For example, research from Consumer Intelligence shows that many people can save up to £501 on car insurance by comparing quotes on Confused.com. But if you buy insurance as part of a car subscription package, you can’t compare quotes, so you’re unlikely to get the most cost-effective option.

Also, CaaS often isn’t a viable option for younger drivers. Many CaaS providers don’t allow drivers under 26 to use their platform. Even if they do, the cost is often prohibitive.

Who is CaaS for?

The CaaS model is gaining momentum, offering unique benefits over traditional car ownership or leasing for specific demographics and lifestyles. Here's a deeper look into who might find CaaS appealing:

Busy professionals: For those with ample financial means but little time, CaaS provides a simple way to enjoy a new car. A consolidated monthly fee, without long-term commitments and car maintenance woes, is a significant draw for those who can afford it.

Eco-friendly users: Since CaaS options showcase the newest car models, subscribers can easily access cutting-edge electric or hybrid vehicles. This is particularly enticing for individuals with solar panels at home. This allows them to power their cars with solar energy, translating to considerable savings compared to traditional car engines.

Occasional drivers: CaaS is an excellent solution for those who don't drive daily. Car clubs offer on-demand access to vehicles, making them ideal for someone like a student who only drives when they visit home.

Commitment-averse users: Those with uncertain financial outlooks or who move abroad regularly may hesitate to commit to a long-term car lease. CaaS allows them to end subscriptions on short notice, ensuring financial flexibility.

Car enthusiasts and the safety conscious: Those passionate about the newest car performance enhancements or the latest safety features could be attracted to CaaS. It provides an easy way to regularly experience the newest car models without the long-term commitment of owning a depreciating vehicle.

What are the challenges CaaS providers face?

Deloitte forecasts that by 2025, car subscription services could capture 10% of the market share.

But the path forward for CaaS has 2 main challenges:

• People aren’t aware of CaaS: In 2021, a YouGov survey found that 78% of Brits weren't familiar with car subscription services. While leasing is becoming more popular, car subscriptions and car clubs are still on the fringe of driving. For CaaS to become mainstream, the general population must understand what it is and who it’s for.
• The cost of living is pricing drivers out: The cost of living is rising significantly due to inflation and other factors. For instance, in the UK, consumer prices were 6.8% higher in July 2023 than in July 2022. This means that the middle class will likely focus on maximising their savings, valuing the most affordable option over the most convenient one.

It’s worth noting that the pandemic has played a big part in slowing the growth of CaaS, as working at home became the norm and people stopped buying cars. The CaaS, and car industry in general, is starting to pick up again. Market research projects a CaaS growth of 6.8% from 2021-2030, leading to a market worth $225 billion.

Will CaaS become more affordable?

As more consumers show interest and competition grows, CaaS providers will likely adjust their pricing and could become more affordable, particularly for middle-class consumers.

Most CaaS options offer hybrid or electric cars. As electric vehicle costs decrease, mainly due to advancements in battery technology and production methods, we can expect CaaS prices to drop.

What can insurers do to adapt to CaaS?

Here's how insurers can strategically position themselves in a CaaS landscape:

Forge strong partnerships with manufacturers: If the direct-to-consumer market decreases due to declining car ownership, insurers will need to start partnering with businesses that do CaaS – namely, manufacturers. This could lead to larger insurers having a monopoly on the car insurance market. Smaller insurers could look to do partnerships with manufacturers by offering value-added services and more tailored plans.

Introduce more flexible insurance options: As CaaS becomes more popular, a 12-month tie-in to an insurance plan might become unappealing to those who value flexibility. Instead, insurers can offer flexible and customisable plans catering to diverse needs. For instance, they could introduce short-term coverage for occasional drivers.

Educate the market: Most people aren’t familiar with CaaS. Insurers can play a role in educating consumers about the benefits and coverage options available, ensuring they make informed decisions.

What can Price Comparison Websites (PCWs) do to adapt to CaaS?

The emergence of Car as a Service is reshaping the landscape for many automotive and insurance sectors, and PCWs like Confused.com are no exception.

There are a few ways PCWs can adapt to CaaS:

Expand comparison services to increase revenue: PCWs are primarily focused on helping users find the best car insurance deals. With CaaS, there's an opportunity to grow by also comparing costs and benefits of various car ownership and usage options. This could include car subscriptions, car sharing, leasing, or buying a car and insurance separately. This helps the customer get a better deal, and it could open up revenue streams for PCWs.

Explore B2B opportunities: An increase in CaaS means more companies will be working with a fleet of cars. PCWs can explore this by helping fleet companies find the best insurance options or collaborating with car sharing providers like Zipcar and Turo. This will allow PCWs to access a profitable and growing segment of the market.

Offer bundled comparisons for convenience: For the ultimate convenience, PCWs could offer a one-stop solution where customers can find everything they need for their car requirements. This could be a platform where users can compare insurance prices and also get information on breakdown cover, financing deals, and warranties for new vehicles: all in one place.

For example, imagine a user interested in a mid-range SUV. The platform could compare various buying options including leasing, buying outright, or using a car subscription service. It might find that leasing is the most economical option. It could then present a range of suitable insurance policies and even suggest a finance plan that aligns with the user's budget and leasing term.

PCWs could offer a product that guides the user at every step, from choosing the car to securing the best insurance and financing deals. This saves the consumer more time and money than simply comparing car insurance, and it keeps PCWs focused on customer-centricity in a CaaS world.

CaaS: An uncertain future for insurers

The rise of CaaS could reshape the insurance landscape. With fewer customers owning cars, insurers may end up focusing more on relationships with car sharing and car club businesses.

CaaS’ emphasis on convenience offers a new approach for consumers, but challenges like awareness and cost remain. Factors such as the affordability of electric vehicles and the prevailing economic conditions play a significant role in determining its uptake.

Regardless of its place in the market, insurers and PCWs still have room to innovate, ensuring consumers always get the best value for money.

If you want to learn more about Confused.com and our history as a consumer champion, read about our journey.