Insurance: Product Or Service?

Insurance is a complex concept that can be challenging to categorise as a product or service. While some may argue that insurance is a product because it involves the purchase of financial protection or reimbursement against losses, others consider it a service due to its focus on meeting customer needs and providing peace of mind. Ultimately, the definition of insurance as a product or service depends on the context and the specific laws or regulations being applied.

Insurance is a contract, represented by a policy

Insurance policies are a form of protection against financial losses resulting from accidents, injury, or property damage. They also help cover costs associated with liability for damage or injury caused to a third party. In exchange for premiums, an insurance company agrees to pay out a sum of money to beneficiaries in the event of the policyholder's death.

There are two main types of life insurance policies: term life insurance and permanent life insurance. Term life insurance covers a specific period, usually 10 to 20 years, and if the policyholder dies during that time, their beneficiaries receive a payment. Permanent life insurance covers the policyholder for their entire life, as long as they continue to pay the premiums.

Insurance is a highly regulated business, with sanctions against insurers who fail to provide the services and indemnity promised by the insurance contract. While insurance is not considered a "good" or a "service" for the purposes of the Consumer Legal Remedies Act, insurers are still required to provide the services outlined in the insurance contract in the event of a covered loss.

The "as a service" model, also known as XaaS, has become increasingly popular across industries, and insurance companies are exploring the possibility of adopting this model to meet customer needs and expectations. This model offers flexibility, mobility, and democratization, allowing customers to access coverage when and where they need it and giving them more control over their data and relationship with the insurer.

Insurance as a service is driven by customers' desire for on-demand coverage

On-demand insurance allows customers to purchase coverage when they need it and deactivate it when they don't, paying only for the coverage they use. This model appeals to customers because it offers flexibility, mobility, and democratization. With on-demand insurance, customers can access coverage anytime, anywhere, and don't have to go through the tedious process of acquiring insurance through an agent or broker.

The rise of on-demand insurance is also driven by the proliferation of connected devices, both in and out of the home. These devices provide insurers with access to customer data, enabling them to understand customer behavior and offer context-specific coverage. For example, Metromile, a pay-as-you-go auto insurance company, combines traditional car insurance with hardware that monitors customer behavior, allowing for a pay-per-mile model.

While on-demand insurance offers many benefits to customers, it also presents some challenges and concerns. Customers may face issues with privacy and the unpredictability of policy payments. Insurers, on the other hand, need to navigate complex state-by-state licensure requirements and make significant upfront investments in infrastructuree.

Despite these challenges, the on-demand insurance market is expected to grow, with customers increasingly seeking personalized and immediate insurance solutions. This shift towards on-demand coverage is driving insurance companies to innovate and adapt to changing customer preferences and habits.

Insurance is regulated at the state level

State insurance departments oversee insurer solvency, market conduct, and, to varying degrees, review and rule on requests for rate increases for coverage, among other things. For example, in Colorado, the Division of Insurance oversees insurance matters. The insurance department is typically headed by a commissioner, who may be appointed or elected depending on the state.

The regulatory system requires rates in insurance contracts to meet the following requirements:

• Adequate to pay for claims filed, avoid insolvency, and maintain financial stability
• Not excessive concerning the cost to consumers
• Non-discriminatory—state laws may prohibit unfair discrimination based on factors other than actuarial risk

All insurance companies within a state are subject to solvency regulations and are required to meet specific capital and surplus requirements, which vary across states.

While insurance is primarily regulated at the state level, there is also federal insurance regulation. For example, the Dodd-Frank Act created the Federal Insurance Office, which monitors the insurance industry, and the Affordable Care Act (ACA) instituted health insurance reforms and prohibited insurance companies from denying coverage for pre-existing conditions.

In summary, insurance regulation in the United States is a complex interplay between state and federal laws, with states having the primary authority to regulate insurers and the business of insurance.

Insurance is not a tangible item

Insurance policies protect against financial losses resulting from accidents, injury, or property damage. They also cover costs associated with liability for damage or injury caused to a third party. Insurance is a highly regulated business, with sanctions against insurers who fail to provide the services and indemnity promised by insurance policies.

The "as a service" model, also known as "anything as a service" or XaaS, has become increasingly popular in various industries, including insurance. This model allows for customised services that meet the specific needs of each client. Insurance as a service appeals to customers because of its flexibility, mobility, and democratisation. Customers can access coverage when and where they need it and deactivate it when they don't, without the traditional tedious process of acquiring insurance through an agent or broker.

The case of Fairbanks v. Superior Court of Los Angeles County further highlights the distinction between insurance and a tangible good or service. The California Court of Appeal concluded that insurance is neither a good nor a service for the purposes of the Consumer Legal Remedies Act (CLRA). The court noted that insurance is a contract involving indemnification against loss and does not qualify as work or labour, and therefore does not meet the definition of a service under the CLRA.

Insurance is a highly commoditised industry

However, some companies are beginning to recognise the benefit of providing insurance as a service, rather than a product. This means that insurance coverage is provided as and when the customer needs it, and can be deactivated when they don't. This flexibility is highly appealing to customers, especially in light of recent events such as the pandemic, where many people were paying to insure vehicles that they were unable to use.

The "as a service" model has already proven popular in the software industry, where customers subscribe to the programs they need, rather than purchasing them outright. This model is now being adopted by other industries, including insurance. Insurance as a service allows customers to regain some control over their data and their relationship with their insurance provider, making it easier to compare and switch coverages.

In addition, understanding the changing needs of different customers can help insurance companies to differentiate themselves in a highly commoditised market. For example, Metromile offers traditional car insurance, but combined with hardware that monitors customer behaviour and powers a pay-per-mile model. This allows customers to only pay for insurance when they are actively using their vehicles.

Overall, the insurance industry is highly commoditised, but there are opportunities for companies to stand out by adopting an "as a service" model and by understanding and responding to the specific needs of their customers.

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