For the last decade, insurers have sought to change automotive underwriting by relying on real data from vehicles, rather than using proxies such as drivers’ estimates of mileage driven, traffic tickets, and accidents. However, as the industry in poised for rapid expansion, a leading expert is suggesting that it is already a failure. But there is a potentially better approach.
There are two elements that are sometimes folded together, but should be kept separate:
Telematics – is the convergence of data collection in the vehicle – location, speed / acceleration, direction / turning, engine operations, vehicle ‘health, etc. and the ability of the vehicle to send and receive information which transports data and receives instructions for the vehicle. (source: Wikipedia)
Usage-Based Insurance (UBI) – “a recent innovation by auto insurers that more closely aligns driving behaviors with premium rates for auto insurance. Mileage and driving behaviors are tracked using odometer readings or in-vehicle telecommunication devices” (Source: NAIC -CIPR )
In the early days, UBI did not use telematics for data transfer. However, the maturation of wireless technology has enabled the vast majority of communications to use telematics for data transfer.
Getting business traction was not easy
If the technology was challenging (and it was), regulation and user acceptance created a maze for insurers to navigate.
UBI introduces real data to price the risk. In addition, there are significant benefits in using actual data in cases of accidents or fraud. UBI / Telematics has the capability of monitoring the driver’s behaviour in real time. According to the NAIC, underwriters would get discrete factors including “miles driven; time of day; where the vehicle is driven (GPS); rapid acceleration; hard braking; hard cornering; and air bag deployment.”
However, regulators and insureds recognized that telematics-based tracking could impinge on privacy concerns, and each jurisdiction put in regulations to fence data collection and use. To move forward, insurers had to adjust to regulations for multiple states / provinces as well as creating their own pricing and underwriting structures.
A non-trivial exercise. But an increasing number of insurers have been getting into the game.
So we’re ready to go and grow?
Possibly. But perhaps in a different direction.
UBI is still in early stages. And there is a long way to go to make UBI a serious segment.
Writing in a seminal post on LinkedIn, Matteo Carbone, Director and Founder of the North American Connected Insurance Observatory, notes that in 2015, 3.3 million cars in the US sent data to an insurance company, which represents 1.5 % of the market.
The PTOLEMUS Consulting Group, which focuses exclusively on telematics and location based services, estimated that the global market for UBI grew by 32% in 2016 to 14 million policies.
This is still small potatoes. And there are other disruptors, autonomous vehicles being one. In March, we noted in this space that automobile insurance revenues could drop 22% by 2030. A recent post from KPMG finds that auto insurance sector could shrink by 71% by 2050.
But there are other directions for innovation…
One market – Italy – has had significant success using Telematics (without UBI). Carbone writes: “Some insurers in this market were able to use the telematics data to create value and share this value with customers.”
Instead of tying the telematics into a UBI model, the Italian insurers provide a device that can be self-installed and is used for liability coverage. The insurer supplies a 20% discount on the policy, and can offer a suite of services, including “stolen vehicle recovery, car finder, weather alerts—with a service fee around €50 charged to the customer.”
According to Carbone, the key is to change the role of insurance from ‘once in a while’ to a daily presence (incentive to maintain the discount), and to ensure that if there is an accident, the telematics will be able to report details the event.
Where could this all go?
Carbone will be presenting the Keynote address at the 2017 Insurance-Canada Executive Forum on 29 August 2017. Immediately following, we will convene a Fireside Chat with Carbone and Canadian insurance leaders to vet this new construct.
Details on this and the full agenda can be found here. Comments welcome below.