New research from Strategy Meets Action (SMA) highlights opportunities and challenges for insurers and intermediaries as they consider how to align telematics and usage-based insurance (UBI) with their strategies. SMA is clear on one point: telematics technology and UBI are disruptive forces which will impact the personal automobile insurance market over the next decade.
SMA surveyed over 200 insurance participants in Q4 2012, of which 111 were insurance company professionals (including some Canadians). This was supplemented by interviews with selected insurers. SMA intendeds to release several reports as a result of the research, the first of which, “Telematics/Usage-Based Insurance: A Catalyst for Change”, focuses on the current state of the market, where the market seems to be going, and what actions practitioners should consider. The report is available for purchase on the SMA website.
We won’t try to summarize the report Rather, we’d like to focus on a few elements that have been overlooked in the general conversation to date. And we’d like your thoughts on where this goes from here.
Customer Awareness and Adoption
The report notes that, “(g)eneral customer awareness is very low right now and is probably the main impediment to UBI growth in the market today.” This is likely due to the low penetration rate to date (the report estimates 1% of the vehicles in the US are insured with UBI schemes). However, those customers who have had exposure to UBI, have had positive experiences and are satisfied with how the programs handle issues such as privacy.
SMA feels that once the awareness issues are handled, there will be substantial growth in the market, and will be led by consumers who will benefit from UBI plans. Conversely, drivers who do not wish to share their driving behaviour will seek out non-UBI insurers. According to SMA, this could create an adverse selection scenario for non-UBI insurers. (We commented on this in a blog post in January 2012.)
At present, there are a few market leaders (e.g., Progressive) , with a number of other carriers introducing UBI in small pilot initiatives. Based on the research conducted, SMA feels that from now to 2020, there will be a steady uptake. A significant portion of the insurers surveyed believe that 50% of the market will have a telematics/UBI component by the end of the period.
Some portion of this growth will come from new entrants specializing in UBI-only offerings directed at specific market segments. (See our post in November 2012 examples.) With a singular focus, these insurers would have additonal competitive advantages: “such companies could have the luxury of scrapping most of what is inside existing rate algorithms, reducing traditional underwriting costs, and perhaps radically reducing the time associated with quoting and issuing policies.”
SMA notes that the majority of telematics/UBI offerings have been through the direct channel to date. SMA believes that this will continue, since “the highest probability of being attracted to UBI offerings, and perhaps the highest profit potential, are young drivers. … (which) is also the segment of the market that is most responsive to direct marketing.” Moreover, according to SMA, independent distribution carriers “face the added challenges of educating, training, and motivating their distribution force, a distribution force that has historically shown itself to be slow to accept change.”
However, SMA also notes that some independents will see telematics/UBI as another opportunity for customer contact and education. Back in April 2012, we blogged on this, citing a few brokers in the UK who were focusing on helping thier customers understand the benefits and limitations of telematics/UBI offerings.
SMA, as is its wont, provided a ‘Call to Action’ following the analysis of its research. There are a number of good recommendations, one of which stands out to us. Telematics/UBI is not a programme that can be implemented without substantial preparation and analysis. There will be changes to marketing, channel strategies, underwriting, claims, etc. Systems changes will be non-trivial in most instances.
On this basis, SMA concludes the report with this suggestion: “Even though the issues and implementations are complex, it is time to begin investing in understanding the market, developing strategies, and deciding on market entry approach and timing.”
What do you think?
We agree. Now we’d like your thoughts. Do you agree that 50%v of market will be UBI by 2020? Does Canada have specific nuances? Is a telematics/UBI offiering on the horizon for you?