As auto insurance enters the center stage, insurance product actuaries are fixing premiums based on usage. There was a time when actuaries worked overtime for an attractive pricing strategy for burgeoning vehicle owners. To bring something revolutionary, it is important that host of factors work together linking diverse stakeholders leading to the development of a product or an idea. In the case of telematics what happened was exactly the same.
Technology is often a two-edged sword where one edge works towards disruption and the other working towards simplification. Both are happening simultaneously in the fast changing world. If this is the case questions like ‘what was disrupted?’ and ‘what was simplified?’ need to be addressed and resolved before going into more details on telematics.
From Disruption to Simplification
Before digital media was popular agents were the go-between for businesses in the auto insurance space. The methodology they used was relying on earlier customer claims, past driving records, and other parameters that were in existence to fix premium for coverage. Today more and more insurance players are targeting the same customer base. Insurers can manage the expected loss, but competition has the potential to create an unexpected loss. If competitors reduce the premium with attractive offers, that can result in an unexpected loss. So, technology gave birth to insurance telematics. Insurance telematics on mobile apps disrupted traditional insurance business model. Usage-based insurance is a product of insurance telematics. Auto insurers widely used UBI to reduce insurance premium. The traditional model that depended on earlier claims, past driving records is being disrupted by UBI. In short, the traditional model for fixing premium was disrupted and the process of auto insurance is getting simplified thanks to UBI.
What telematics is for auto insurers? UBI is here to stay owing to factors like large mobile population, ease of handling claim by insurers where data is available on the cloud. Thirdly, the driving community does not have any other option as the fleet managers and businesses who are concerned about workforce productivity have already automated their processes in these lines. So the situation is favoring for massive UBI adoption by all stakeholders. Is there any other pull factor? Let us explore that also.
Transfer of Risks is the Way to Profitability
Fraudulent claims eat the profits of insurers. In insurance telematics, data is used to determine the location of car, speed of driving, accelerating, and driver scorecard to process a claim. Insurance is all about managing and handling risks. Economists in the insurance domain states, ‘Insurance is the transfer of risk, gambling the creation of risk’ etc. Look at the risk. The risk is the threat of fraudulent claims that erodes the insurance profitability. The success of insurance business lies is in transferring the risks. What helps in transferring the risks? Guess what saves insurance from making a loss. Isn’t it the telematics data that helps insurance investigators in disproving fraudulent claims?
So, identifying fraudulent claims is one way to improve the profitability. Is there any other way to grow bottom line profits? Yes, the only way is in attracting more customers with the offer of discounts. If discounts are offered simply to survive in competition, it will again lead to the annihilation of profits which insurers don’t want to happen. It is at this stage insurers should pitch for telematics. UBI adoption is highly favorable due to customer mobility, workforce mobility, and executive mobility. Executives, as well as internal stakeholders in the insurance industry, will anyway pitch for UBI. Among the drivers, the majority will embrace UBI as it reduces the premium burden which means almost all stakeholders are benefited by UBI a feature of insurance telematics. According to Insurance Agency America Agency Equity report, 72% prefer UBI over traditional auto insurance thereby enabling 30% cost advantage on premiums.
The future of the insurance industry lies is in adopting telematics. Insurers who are slow in embracing disrupting technology can think on repositioning strategy with insurance telematics as its fulcrum.