We’ve followed Telematics/Usage-Based Insurance (UBI) for some time now. There has been significant progress, and there is an assumption that it will have a 25% market share over time. Of late, however, some folks are suggesting that UBI could plateau early just as other forces start to shape the next generation of automobile insurance.
Usage-Based Insurance Really Should Work!
The way automobile insurance is rated and priced pleases almost no one – except journalists (who find every quote fodder for another column on how bad things are). So, anything that makes the process simpler, more transparent and tied to common principles should help.
On the surface, telematics-enabled UBI fits that bill. With a UBI infrastructure, we could rely on algorithms to manage rates and premiums, and focus on important things like improving service and claims handling.
It started out so simple …
We even had a champion. Progressive Insurance, after a false start, introduced a simple, consumer-friendly program – Snapshot – supported by massive marketing dollars. It seamed to be fool proof.
By 2010, we were writing about Snapshot hitting its stride. We all were just waiting for others to come on board. Experts were suggesting we would hit a critical mass by 2017 and would round out at 25% market share in the middle years of the 2020s.
And insurers and consumers are prepared
A 2015 report from the US National Association of Insurance Commissioners (NAIC) – Usage-Based Insurance and Vehicle Telematics: Insurance Market and Regulatory Implications – finds that US insurers are taking to the UBI approach: “more than half of the major insurers in the U.S. have an active telematics UBI program, and several others are conducting market trials for their own UBI offerings.”
And, on the surface, consumers are open to the concept. Citing a Deloitte study, the NAIC staff report that 25% of consumers would allow monitoring of driving behaviour without any minimum discount and a further 25% would allow monitoring if the discount were high enough.
But data management is on the critical path …
The NAIC report notes that data management is a critical success factor. And these tools are well within reach. However, it seems that insurers are not taking advantage of them:
the insurance industry, for the most part, has not yet moved to richer and more granular data that includes not only driving behavior, but also environment (i.e., road type and conditions, traffic patterns, etc.) and still depends on exposure-related driving variables such as mileage, duration of driving, and number of braking or speeding events, which are just secondary contributors to risk.
And the regulators want a say ….
Sandra Castagna, Associate Commissioner from the Maryland Insurance Administration (Retired), contributed the Regulatory Implications section for the NAIC report. Castagna notes that the initial telematics construct was simple enough: mileage information collected by a device in the car would be transmitted to the insurer where “a premium discount is applied to the policy by the insurer.”
However, with advanced devices and data analytics, Castagna writes: “telematics-based UBI programs are no longer as simple and straightforward as they used to be”.
And this presents challenges to regulators in reviewing rate filings. Castagna notes:
The challenges presented here are neither inconsequential, nor insurmountable; however, they do warrant attention. Vast amounts of information are collected, stored, analyzed and incorporated into rating plans by or on behalf of insurers. Currently, regulators must determine if the rating plans comply with rating laws, if premiums charged are in accordance with those filed plans and if appropriate disclosure
Not trivial stuff. It will take time.
Meanwhile, back on the street ….
Other forces are having an impact on automobile insurance. Younger, urban consumers are moving away from personally owned automobiles. Self driving vehicles have moved from science fiction to practical fact.
The impact on insurance is not certain, but few regard it as benign. Even Warren Buffett acknowledges it.
There’s a forum for your thoughts…
Are we getting close to a Telematics Plateau? I’d be interested in your thoughts in print here or in person.