Insurance telematics (UBI) and Usage Based Insurance continue to be introduced around the world. Insurers must choose the right business model to succeed in the rapidly changing market. Many programs have a price discount focus, which leads to a predictable race to the bottom. However, the industry is making strides to select the best companies to succeed.
Auto insurers have recently introduced Usage Based Insurance (UBI). This allows them to more closely match the driving habits of their premium rates for auto insurance. The driving behavior and mileage are monitored using odometer readings, in-vehicle communications devices such as telematics, or self-installed equipment already installed by car manufacturers. Telematics auto insurance’s main purpose is to track the driver’s driving behavior while they are driving. These telematics devices can be used to measure many elements that are of interest to underwriters, including miles driven, time of day, rapid acceleration, location of the vehicle (GPS), hard breaking, hard cornering, and air bag deployment. The amount of data collected will depend on the technology used and whether policyholders are willing to share their personal data. The insurance company then assesses the data, insurance premiums or insurance charges. A driver who drives long distances at high speeds will be charged more than someone who drives shorter distances at a lower speed. UBI premiums can be collected by a variety methods including direct billing, debit accounts, smart card systems, and gas pump usage.
The first UBI programs started to be offered in the U.S. about a decade ago. Progressive Insurance Company and General Motors Assurance Company (GMAC), began offering mileage-linked offers using combined GPS technology and cellular systems that tracked the miles driven. These offers can still be combined with other benefits like roadside assistance or vehicle theft recovery. Technology’s current advancements have made telematics more efficient and cheaper. This allows insurers to track not only how far people drive but also when and how often they drive. These strategies led to the rise of UBIs such as Pay-As You-Drive (PAYD), PAYG, PAY-As You-Go, PHYD, and Distance-Based Insurance.
Insurance Pricing
UBI pricing schemes are very different from traditional auto insurance. Traditional auto insurance uses actuarial studies of historical data to calculate rating factors. These include driving record, marital status, credit-based score, credit score, vehicle type and garage location. Previous claims, liability limits, deductibles, and liability limits. Premium discounts can be found on traditional auto insurance. These discounts are typically limited to bundling insurance on multiple vehicles or types, insurance with the exact transporter, protection devices and driving courses.
Traditional auto insurance is often viewed as a fixed cost. Policyholders can also be assessed annually, but they are usually paid in lump sums on an anual, semi-annual, and quarterly basis. Studies have shown that mileage driven is associated with higher loss and claim costs, especially when pricing factors such as territory and class defer. This could be why many UBI programs try to reduce fixed costs associated mileage driven costs. These costs can then be combined with other premium rating factors.
The advantage of using individual driving patterns and not relying only on past trends or events to determine premium pricing is that usage-based insurance can be more personalized and precise.
Challenges
Privacy concerns have been raised by tracking mileage and behavior data in usage-based insurance programs. Some states have passed legislation that requires disclosure of tracking practices. Some insurers also limit the amount of data they collect. Although this isn’t for everyone, it is becoming more common to share information with the help of technology such as tablets, smart phones and GPS devices. Plus, Twitter and Facebook are also entering the market.
The cost and time required to implement a UBI program that primarily uses telematics, can prove costly for the insurer. UBI is still a new area, so there are many questions about how to integrate driving data into existing and new pricing structures. This is vital as lower premiums and the migration of low-risk drivers to usage-based insurance programs could cause pressure on overall insurer profitability.
Advantages
Insurers, consumers, as well as society, have many benefits from usage-based insurance programs. This is a way to tie insurance premiums to actual vehicle performance or fleet performance. This makes it more affordable for low-risk drivers who are often also lower-income. Consumers can also control their premium costs, as they are able to reduce the number of miles they drive and to adopt safer driving habits. Society benefits from safer driving and fewer miles.
Telematics can be used by insurers to help them estimate the accident damage and to reduce fraud. They can also use telematics to assess driving data in an accident to determine whether there was any driver error. Aside from the safety benefits, many UBI programs that use telematics can also be used to reduce vehicle theft and accident costs. Telematics-based UBI programs allow for the tracking and recovery of stolen vehicles.
