By the year 2020, one in five insurance company professionals predict usage-based insurance (UBI) will capture more than 50 percent of the personal auto insurance market, according to “Telematics/Usage-Based Insurance: A Catalyst for Change,” a research paper from Strategy Meets Action.

According to the research, the consensus opinion is that UBI will grow rapidly over the next 10 years, however, “there is no unanimity of opinion as to how big a share of the market UBI will ultimately have, what it will look like, and what it will do to the traditional market,” SMA said, adding that UBI is just a part of a much larger trend in vehicle telematics, which will potentially reshape other industries as well.

SMA notes that most of the 10 largest private passenger auto writers have UBI programs, but that they are not heavily promoted and most are available in just a few states. Several are only marketed to specific market segments, such as teen drivers or those with incidents, or as a low-mileage discount offering. “Outside of the largest companies in the auto insurance business, there is very little activity in the UBI space beyond some internal programs and pilots,” SMA said. One notable exception is Progressive, which has installed more than a million telematics devices and collected data on more than 5 billion miles driven over the course of more than 10 years.

SMA found several impediments to the wider adoption of UBI, which is necessary for the concept to become economically viable in the personal auto market.

Customer awareness of the product and its benefits. Awareness is currently low, although advertising campaigns from Progressive could produce significant increases in public awareness.

Customers must accept compromises in their privacy in exchange for discounted insurance premiums; survey results indicate a strong willingness to provide driving behavior data in exchange for discounted rates.

Positive customer experiences. UBI technology is now advanced to the point that insurers can deliver attractive, branded devices that are easily installed by customers. Many UBI insurers also offer Web portals that allow customers to see their driving behavior data and easily translate that to expected insurance savings, and offer coaching to help customers improve their scores and increase savings.

A large enough portion of customers must see substantial savings as a result of participating in UBI programs.

Other factors that will influence the adoption of UBI include:

Cost of program to insurer versus benefit

Patents owned by Progressive Insurance

State regulation

Loss Experience

SMA examined active UBI programs to understand the variety of product offerings, and found that many are still under development and likely to quickly and significantly evolve. Other SMA observations on UBI program features include:

Telematics devices – The market currently is dominated by company-provided and branded devices that plug into a car’s diagnostic port.

Limited measurement period –Most insurers sample just 3 to 6 months of driving in the interest of keeping the per-vehicle cost down, which compromises the precision of mileage and driving habits.

Eligibility – Three-quarters of insurers extend UBI discounts to all of their customers, but some limit eligibility to young drivers or to other segments of the market.

Data Collected – The most common data collected include mileage, hard braking incidents, rapid acceleration and time of day. Speed, location, routes driven and sharp turning are used less frequently.

Discount Structure – All UBI programs feature potential discounts with the average ranging from 10 percent to 15 percent; however Travelers offers discount of up to 20 percent and State Farm offers up to a 50 percent discount.

Consumer Portals – Most insurers (64 percent) offering UBI discounts also offer a consumer portal for customers to review their personalized results, including estimates of potential discounts, and safe driver coaching.

The SMA survey was conducted during Q4 2012, and included responses from more than 200 industry participants and 111 insurance company professionals. Insurer respondents included both P&C personal and commercial auto lines and companies of all size. Approximately half of the companies with active UBI programs in the market participated.

Click here for a slideshow revealing the "11 questions to ask before developing a UBI strategy."

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