The Automotive Insurance Landscape Requires Innovation
The automotive industry has seen a significant increase in the number of OEM captive finance companies entering the vehicle insurance market in recent years. Their entry is sharply transforming the landscape for all players involved.
OEM captive finance companies are financial institutions owned by the automakers themselves that offer financing services for vehicles to customers. These companies have rapidly grown in the Mexican market as "60% of the vehicles in Mexico are purchased through credit and 79% of these credits come from captive financing companies, 18% from banks and 2% from self-financing companies,” says Guillermo Rosales, Executive President, AMDA.
One of the main benefits of their entrance into the insurance market is that they provide customers with a more comprehensive and integrated car-buying experience. Rather than having to work with multiple providers to purchase a vehicle and obtain insurance, customers can now work with a single entity that offers both services. This simplifies the purchasing process, making it more convenient for customers and potentially boosting vehicle sales. In addition, OEM captive finance companies can leverage their existing relationships with automakers to offer customers insurance packages that are tailored to the specific features of their vehicles. For example, a luxury automaker’s financing company could offer insurance packages that cover high-end features such as advanced safety systems or high-performance engines, providing customers with personalized coverage options and helping to drive sales of more expensive vehicles.
The entry of OEM captive finance companies into the vehicle insurance market represents a significant challenge for traditional vehicle insurance companies, which now face increased competition and potential disruption of their business models.
These circumstances require flexibility and innovation from traditional players. "Insurance must also be flexible so that it adapts to customers' payment capabilities,” says Víctor Rojas, Director of Automotive Banking, BBVA. A key aspect of the insurance contract is a focus on the client's needs, rather than only on car features. “Companies must be flexible when offering packages to clients, ensuring that the product is economically feasible for them. It is important to separate insurers’ wide offer with the actual paying capacity of each client,” adds Rojas.
Insurance is always necessary but as competition increases, insurers must focus on offering a wider variety of services that complement insurance. This will allow them to differentiate themselves from other providers. “Insurance is mandatory in a credit contract, because it also protects the financial institution. This has led insurers to create more innovative products. Insurance has basically become a commodity,” says Jaime Pedraza, Country Manager, GarantiPLUS Mexico.
To keep up with the market, insurers of all sizes are looking to digitalize their operations to make credit acquisitions more transparent, which will simultaneously make their products more attractive to younger generations. “It is a great differentiator to allow users to access an automotive credit with insurance, warranty and accessories,” says Rojas. The goal is now to connect the platforms of different players like insurers and credit institutions into one single place.
However, insurers’ ability to venture into new digital models is being barred by the legal framework and insecurity, says Fernando Ardura, Chief Business Officer, Traffilo. “It is true that major marketplaces have grown exponentially. However, we are missing the opportunity to have P2P marketplaces, because users do not trust such schemes due to the lack of rule of law and organized crime,” he adds.
In Mexico, companies do not have a proper method to measure risk when evaluating a potential insurance user, says Ardura: “In other countries, insurers have tailored insurances based on the user’s driving habits. We now have the technology to do so. I am not talking about making insurance cheaper but fairer.”