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The Road Ahead for Auto Insurance is Paved with UBI

Intact’s recent announcement that it will launch a UBI program in Ontario this April is a clear indication that the model has come of age in Canada. Other telematics-enabled auto insurance programs have come to market recently in Canada, including Quindell’s Ingenie and Desjardin’s Adjusto programs, but Ontario is the nation’s largest market and Intact is the country’s largest auto carrier.

But what’s driving this adoption and why are carriers so anxious to invest in this heavily disruptive marketing and pricing model whose most likely outcome is revenue reduction of 5% or more? Does the industry expect earnings to contract permanently or do they plan to recover the lost income somehow and, if so, how?

It’s the latter and here’s why.

Rate Rollback is a Start, but then….

Part of the answer of course is that Ontario has mandated an auto rate rollback of 15% over the next two years and UBI is certainly one way for carriers to comply while attracting the better (safer) drivers whose driving behavior warrants larger discounts. Telematics also holds the promise of being able to reduce accident rates and lower claim frequency and related costs.

However, telematics programs impact virtually every area of the insurance enterprise and require significant investment for what is likely to be a small fraction of all policies in force for at least several more years.  So are carriers betting that anticipated reductions in claim costs will offset the new investments required plus the reduction in income? Not likely!

Claims Costs and Expenses Targeted

Claim costs represent about 80% of all auto insurance costs and the vendor supply chain (body shops and auto glass firms, car rental companies, salvage pools, IAs, attorneys, etc.) comprises the majority of these costs.  We can expect (and are already seeing) increasing pressure on these vendors to reduce costs through formal carrier procurement organizations that will leverage carrier volume, coupled with technology-enabled process improvement tools including vendor performance management.

In addition, industry cooperation in pooling data for fraud detection and deterrence through advanced analytics (i.e. CANATICS) has the potential to remove several more points in fraudulent loss costs.

Finally, Customer Engagement and Consolidation

And one of the anticipated longer-term potential insurance industry benefits of strong usage-based adoption is the ability to monetize the telematics channel with policyholders through much greater customer engagement and the sale of a tiered menu of in-car and other safety, security and travel related services.

Finally, the continuing consolidation in both the carrier and vendor services industries, which is being driven by the demand for greater efficiency through economies of scale, can be expected to add a few more points of income improvement.

So the usage-based insurance traction we are now seeing is just one of the many dramatic changes the auto insurance ecosystem is undergoing – it just happens to be one that engages and impacts consumers most directly – and features a higher degree of pricing fairness than previously existed.

 

Editor’s Note: Stephen Applebaum, Principal, Insurance Claims Solutions Group, is a subject matter expert in insurance information ICTC-wheel-plain-r60technology as applied to the North American Property & Casualty insurance industry  osystem, including the claims supply chain.  Stephen will be presenting on Innovating in Claims at the Insurance-Canada.ca Technology Conference 2014

One Comment

Blair Currie

I agree with the comment that the wise insurance companies are now adopting insurance telematics because they have a good idea on the relatively fast payback, but more important they don’t want to get caught on the losing end of “adverse selection”.

In our experience of running 8 US UBI programs and launching 2 in Canada we’ve developed a business model “Calculator” that helps assess the break even period for insurance telematics.

This model includes the revenue from claims reduction, maintaining those top drivers who might otherwise be enticed by a competitor’s telematics program, attracting new good drivers (UBI is generally “self selecting”) increasing loyalty of existing drivers and offsetting the costs with value added services (e.g., roadside assistance, cellphone blocking technologies, automatic vehicle locator, vehicle health). These benefits are offset by the initial upfront costs and monthly reoccurring costs (for wireless charges, customer care and program management). The model is quite flexible and can help our customers review a business case – with multiple scenarios – in short order.

In general we have found that the “early adopters” and “fast followers” do well because they find claims drop from both attracting great drivers and changing behavior. And we expect the same for Canada.

That said, there are some programs where the payout is higher – such as with commercial lines and with young drivers, where the actual benefit is saving lives.

And as a “Connected car” company we have thoughts on how insurance telematics will transform the entire auto insurance ecosystem.

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