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Should usage-based insurance remain a niche auto insurance market?
Drivers who choose to have their performance monitored in real time to determine the price they pay for auto insurance remain the exception rather than the rule. The question is whether this is surprising, or even a bad outcome for carriers, at least for the short term.
Instead of depending upon generic factors often beyond a consumer's control to underwrite and price auto coverage, monitoring how people actually drive should generate more pertinent indicators. Usage-based insurance (UBI) tracks whether policyholders speed, take turns too sharply or stop short too often, the kinds of conditions they drive in, and even whether their vehicles are properly maintained. It seems intuitive that such granular, experiential information should beat pricing based on more traditional proxy data such as age, home address, type of vehicle, level of education, or credit history.
Yet UBI remains a relatively small niche market. Exact numbers of users are hard to come by, but, at a symposium I attended this spring, one leading auto carrier put the total number of connected drivers at about five percent for North America. Globally, only Italy appears to have just barely cracked double digits, those at the symposium noted.
So, why hasn't UBI caught on with a much wider customer base, and what are the implications for insurers? The technological, marketing, and distribution challenge is complex, according to participants at the recent "Next Gen Analytics and IoT: Powering InsurTech" symposium, organized by the Center for Executive Education at St. John's University in New York City. Panelists and attendees representing incumbent carriers, InsurTech disruptors, and telematics service providers shared war stories and offered opinions about why UBI hasn't taken off more quickly among US drivers.
From an insurer's perspective, the business case to collect detailed information showing how well policyholders operate vehicles appears to be self-evident, as being a "backseat driver" should give connected carriers keener insights into how likely policyholders are to get into an accident. Yet from the buyer's perspective, the possible reward purely in terms of lower premiums may just not be compelling enough for the vast majority of drivers, especially given the additional steps that need to be taken to get on board with UBI.
Three obstacles to faster UBI growth
First, buying a standard auto policy requires very little of the insured, beyond checking boxes on an application. Taking on UBI, on the other hand, means having to install a new device in your car or figuring out how to activate one already included by the manufacturer. The alternative of simply downloading an app may overcome such objections (if that option is available), but that also makes the coverage dependent on everyone driving the car putting the app on their mobile phone and registering with the program. Meanwhile, if there are any problems installing or activating the technology, aggravation would ensue for the consumer, as well as the unfortunate agent or customer service representative who fields their complaint.
Second, as noted by symposium participants, people generally don't ask their agent or carrier for UBI unprompted. They need to be sold on the idea. The logistics and value proposition must be explained to them. Those are extra steps for agents selling auto insurance, where commissions are already relatively low (especially for UBI policies, which start with a substantial discount to get drivers on board). As for consumers buying coverage direct online, without an agent to force the issue or explain the nuances, UBI adds a level of complexity to an otherwise straightforward transaction.
Third, there may yet be reliability issues with the technology itself. For example, I heard at the symposium that if a driver goes under a bridge or overpass, the telematics monitor may register that as a hard stop and deduct points off the policyholder's score.
Ultimately, resistance to UBI could come down to drivers considering the whole package and simply asking, who needs the hassle?
Should UBI insurers be concerned?
Given these challenges, it's no wonder this market is developing so slowly. But should UBI insurers be terribly concerned about such growing pains? I would think not. Indeed, the obstacles outlined above should only be problematic if the goal is universal monitoring of policyholders. On the other hand, if the primary objective is to attract and retain the best drivers generating the fewest insured losses, these barriers actually might serve as a culling process, separating the wheat from the chaff.
Common sense suggests that those who consider themselves truly superior drivers wouldn’t necessarily let these speed bumps stand in the way of a substantial UBI premium discount, which carriers at the symposium indicated is usually around 20 percent when the policies are first issued. If telematics proves they are good drivers, insurers should be pleased to put these prime policyholders on their books, as claims costs would likely go down. If a particular policyholder is mistaken about how ably he or she drives, that, too, should show up via telematics, and the premium could be adjusted accordingly, with a clear rationale provided for any increase. For cases in between, the discount could be lessened, but not eliminated entirely—a fair compromise.
For the time being, perhaps insurers should focus on analyzing and leveraging the massive amount of telematics data produced by this niche to perfect their UBI-based models and prepare to defend the resulting pricing decisions to consumers and regulators down the road. Regulators haven't yet made much of a fuss over UBI because pretty much everyone who signs up is getting a discount. But what happens once telematics data is used to justify higher than standard rates, or if insurers decide to automatically add a surcharge for those who don't accept monitoring? Insurers may yet have some explaining to do and will need hard data correlations to validate their UBI programs.
Longer term, insurers should avoid falling into the trap of focusing on price alone in marketing auto insurance in general and UBI in particular. To convince more drivers (even average ones) to go the UBI route, insurers need to get the word out that a lower premium is only one of many benefits, and not even the most important one. By using telematics to help drivers improve their performance and avoid accidents, UBI may literally be saving lives—those of policyholders and their loved ones. Now, that's a compelling message for insurers and agents to market!
In the meantime, insurers can console themselves that those who take a pass on UBI are very likely paying a higher premium than their monitored counterparts, regardless of how well they drive. If word gets around, that reality check alone may help convince more drivers, particularly the better ones, to take the leap of faith and see how they measure up telematically.
By using telematics to help drivers improve their performance and avoid accidents, UBI may literally be saving lives—those of policyholders and their loved ones. Now, that's a compelling message for insurers and agents to market!
QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.