Insurance telematics and Usage Based Insurance (UBI) programs continue to roll-out across the globe. The rapidly changing landscape is making the insurers select the accurate business models to ensure success. However, many programs are out with a focus on price discounts resulting in a foreseeable race to the bottom; but the industry is moving in the direction to subset the companies to succeed.
The recent innovation by auto insurers – Usage Based Insurance (UBI) is more closely align the driving behaviors of premium rates for auto insurance, while the mileage and driving behaviors are tracked using odometer readings or in-vehicle telecommunication devices such as telematics which are typically self-installed into a particular vehicle port or already integrated equipment installed by car manufacturers. The essential idea of telematics auto insurance is to monitor the driver’s behavior directly while the person drives. With the help of these telematics devices, you can measure a number of elements of interest to underwriters-miles were driven; time of day; rapid acceleration, where the vehicle is driven (GPS); hard breaking; hard cornering; and air bag deployment. The level of data collected will generally reflect the telematics technology employed and the policyholders’ readiness to share personal data. Then the insurance company assesses the data and insurance charges or premiums accordingly. For example, when a driver drives long distance at high speed will be charged a higher rate than a driver who drives short distances at minimal speeds. While UBI premiums are collected using a variety of methods, including utilization of the gas pump, direct billing, debit accounts and smart card systems.
About a decade ago, the first UBI programs began to shell in the U.S. and this is the time when Progressive Insurance Company and General Motors Assurance Company (GMAC) began to offer mileage-linked offers through combined GPS technology and cellular systems that tracked miles driven. These offers are still in combined with ancillary benefits such as roadside assistance and vehicle theft recovery. The current accelerations in technology have augmented the efficiency and cost of using telematics, enabling insurers to detain not just how many miles people drive, but when and how they drive too. Such strategies helped to result in the growth of several UBI variations, including Pay-As-You-Drive (PAYD), Pay-As-You-Go, Pay-How-You-Drive (PHYD), and Distance-Based Insurance.
Usage Based Insurance Pricing
The pricing schemes for UBI are included greatly from the traditional auto insurance. Traditional auto insurance relies on actuarial studies of aggregated historical data to create rating factors which include driving record, personal characteristics (age, gender, and marital status), credit-based insurance score, vehicle type, garage location, vehicle use, previous claims, liability limits, and deductibles. You can find premium discounts on traditional auto insurance which are usually limited to the bundling of insurance on several vehicles or types of insurance, insurance with the same transporter, protection devices, driving courses, home-to-work mileage and more.
While policyholders think of traditional auto insurance as a fixed cost, or can be assessed annually by usually paying in lump sums on an annual, semi-annual, or quarterly basis. But, studies show that there is a strong correlation between loss and claim costs and mileage driven, particularly when existing pricing factors defers (such as class and territory). Maybe this can be one reason, many UBI programs seek to change their fixed costs associated with mileage driven costs that can be used in combination with other rating factors in the premium calculation.
Usage-based insurance has an advantage of utilizing individual and current driving behaviors, rather than relying on aggregated information and driving records of past trends and events, making premium pricing more individualized and precise.
The challenges like tracking the mileage and behavior information in usage-based insurance programs have raised privacy concerns; as a result, some states have enacted legislation requiring disclosure of tracking practices and devices. Furthermore, some insurers limit the data they collect. This is not for everyone although; but acceptance of sharing the information is growing as more mainstream technology in devices such as smart phones, tablets, and GPS devices. And moreover, social media networks like Facebook and Twitter also enter the market.
Implementing a UBI program, mainly one that utilizes telematics can be expensive and resource-intensive to the insurer. In addition, UBI is an emerging area and therefore there is still much hesitation in selecting and understanding of driving data and how it should be integrated into existing or new price structures to maintain profitability. This is very much important; as the transitioning of lower-risk drivers into usage-based insurance programs offers lower premiums could put pressure on overall insurer profitability.
Usage-based insurance programs offer many advantages to insurers, consumers, and society. The main aim is to link the insurance premiums more closely to actual individual vehicle or fleet performance. This increases affordability for lower-risk drivers, many of whom are also lower-income drivers. It also gives consumers the ability to control their premium costs by incenting them to reduce miles driven and adopt safer driving habits. Fewer miles and safer driving also aid in reducing accidents, congestion, and vehicle emissions, which benefits society.
The usage of telematics help insurers to more accurately estimate accident damages and reduce fraud by enabling them to evaluate the driving data during an accident. In addition, the ancillary safety benefits accessible in conjunction with many telematics-based UBI programs also help to lower accident and vehicle theft related costs by improving accident response time, by allowing the stolen vehicles to be tracked and recovered.