Early adopters of usage-based insurance programs, also called insurance telematics, are gaining a wealth of data, experience and insights that could provide long-lasting competitive advantages, according to “Overcoming Speed Bumps on the Road to Telematics,” from the Deloitte Center for Financial Services.

Usage-based insurance (UBI) programs are based on the collection and analysis of individual driving data for rating and underwriting purposes, and the use of networked sensors for behavioral underwriting is likely to expanded beyond auto insurance into homeowners, life and health coverages, as well as non-auto commercial lines, such as workers’ compensation.

See also: Progressive UBI Patents Cancelled

“Even if UBI is merely part of the natural evolution of auto insurance underwriting in an increasingly data-driven age, carriers of all stripes will likely need a strategy to respond to those that embrace telematics. Some will decide to go along for the ride, while the rest will have to figure out alternative routes to survive and prosper,” Deloitte said.

Deloitte identified three groups among the insurers responding to the survey, eager beavers, which have already implemented UBI programs, fence sitters, which are delaying implementation while watching learning from others’ mistakes, and naysayers.

See also: Telematics-focused Broker Ingenie to Enter U.S. and Canadian Markets

Fence sitters face a number of potentially critical strategic questions, Deloitte said, including:

  • What will be the consumer adoption rate for UBI, and how quickly will the market materialize?
  • What percentage of their book might UBI business represent?
  • How much would they have to invest to build a telematics capability?
  • What impact might telematics have on their risk segmentation and pricing scale?

“Even if telematics fails to take off immediately and ends up attracting a relatively small portion of the market at first, the insights gained from analyzing driving behavior and incorporating them into pricing models may still offset the investment in a data-pooling arrangement,” Deloitte said.
See also: Verisk Dives into Telematics Market

Even naysayers will be impacted by UBI, Deloitte said, and could end up as niche players, potentially redefining non-standard auto insurers.

“Carriers that choose not to go the UBI route will likely have to formulate and execute an alternative retention and growth strategy, if only to ward off the competitive threat posed by those employing telematics,” Deloitte said. “The challenge is whether an insurer can come up with an attractive value proposition for that naysayer consumer segment by relying on more traditional underwriting criteria while also introducing value-added services and product features to help differentiate and de-commoditize personal auto insurance.”

Deloitte identified three groups among the consumers responding to the survey, a quarter said they were eager to embrace UBI technology in return for discounted premiums; a quarter were described by Deloitte as fence sitters, those holding out for higher discounts; and naysayers, just less than half of those surveyed, rejected the idea of being monitored.

Of those consumers interested in participating in a UBI program, one in five expect a discount of 10 percent or less; half expected discounts ranging from 11 to 20 percent; a third expect discounts of more than 20 percent, Deloitte said. Younger drivers were more eager for the technology, and neither gender nor income were important factors in terms of openness to participating in a UBI program.

“Income was not a differentiating factor, which was surprising considering that one might expect those with less discretionary funds to place more emphasis on how much they would save on their auto insurance premiums by signing on to a UBI program,” Deloitte said. “Yet, only about 30 percent of both the highest (above $100,000) and lowest (below $50,000) income groups surveyed said the size of the discount would determine whether they would allow their driving to be monitored.”

First movers into the UBI market have predominantly lured in customers based on discounted premiums in an effort to increase market share. But as insurers accumulate driving data and create actuarially credible UBI data sets, Deloitte said discounts likely will need to be earned through safe driving behaviors, and already some insurers are waiting to implement discounts until after the first policy term or offering value-added services instead of discounts.

Those value-added features include:

  • Offering immediate feedback driving behavior
  • Alerting drivers about potentially hazardous road conditions or traffic slowdowns
  • Facilitating roadside assistance or claim notification in case of an accident
  • Locating lost or stolen vehicles
  • Geo-fencing to allow parents to monitor a teenager’s location and driving behavior

“[F]rom the insurance provider’s perspective, besides leveraging telematics for more accurate underwriting and pricing, real-time monitoring devices could also help establish more frequent connections with—and increased loyalty from—their customers,” Deloitte said, including focused advertising, location based services, rewards for specified behaviors and recommendations for lifestyle choices. Deloitte also noted the “halo effect,” in which people are more likely to behave positively knowing that they are being monitored. 

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