Telematics and Usage Based Insurance (UBI) are among the modern trends in auto insurance this technology promises the ability to create more granular pricing segmentation and improve the accuracy of pricing by using a customer’s actual driving behavior as the basis for generating rates. The feedback provided to drivers also has potential for actually changing driver behavior to safer levels.
For Insurance Companies considering entering the Usage Based Insurance market, there are a number of important areas to assess. The technology is still evolving, and there are several business models to evaluate. The Usage Based Insurance comes with real costs, so carriers need to consider their options carefully.
The first area to evaluate is whether Usage Based Insurance fits within the Company's strategic market.Insurance Companies looking for long-term customers will likely find this a good match with their strategy. However, carriers that focus on the sub-standard market, or short-term policies, may not benefit from Usage Based Insurance because of the cost of the infrastructure needed to support it.
Assess not only which customers are likely to switch to a Usage Based Insurance based program,but also what the implications will be for those customers who don’t switch. Customers that demonstrate superior driving skills will certainly earn a lower premium. Those customers, though, who don’t switch are likely to experience higher prices due to the normal skewing of rate distributions. Insurance Companies may need to plan for a higher defection rate from those customers.Companies that are considering moving forward with telematics have different business models to evaluate.
Two dominant business models are being used in the industry today. Pay as You Drive (PAYD) typically charges a customer based on actual, documented miles driven.
Pay How You Drive (PHYD) generally bases pricing on a variety of dimensions related to the driving behavior of the customer, such as rapid accelerations and decelerations, the time of day, the routes driven and the territories driven through.
Companies can either use installed devices and collect granular driving data themselves, or can work with a provider that sends them aggregated data that can be used as input to rating models. The Pay As You Drive vs. Pay How You Drive decision has significant implications for Insurance Companies as it affects the technology requirements and influences how they can utilize telematics as a service offering for their customers.
If an Insurance Company is planning to utilize an installed device, additional considerations apply, such as how to distribute the device, install the device, provide customer support for the device, collect data from the device and retrieve the device in the event of customer defection.