Auto insurers embracing a "wait and see" strategy for usage based insurance (UBI), could end up underpricing bad risks that UBI insurers will avoid, according to “Usage-Based Insurance in the North America, Europe, and South Africa: Preparing for Takeoff,” a report from Aite Group.
While UBI constitutes just 1 percent of the private auto insurance market currently, Aite projects that will increase to 10 percent by 2017 and 20 percent by 2020. More than half (56 percent) of American consumers surveyed for a previous Aite Group report said they are interested in using the technology to lower premiums, and adoption is expected to accelerate.
“By 2023, automakers will have added 1 billion new cars on the roads around the world, about 150 million of them in the United States alone,” Aite Group said. “These cars will be outfitted with a variety of telematics technologies as standard, creating a prime opportunity for insurers to leverage OEM partnerships, customize what would otherwise be a commoditized insurance product, and extend their customer relationships in new and innovative ways.”
Currently, there are 3 million private passenger auto insurance UBI policyholders in North America, Europe, and South Africa, Aite found, but the factors limiting UBI acceptance are falling away.
Adoption rates have historically been dampened by the cost of the technology, insurers’ ability to support programs with data and analytics infrastructure, lack of regulatory readiness, consumers' privacy concerns and patent-infringement concerns, Aite said.
However, the cost of telematics hardware has declined 80 percent over the past five years, Aite said, and the cost of wireless data transmission has become more ubiquitous and less expensive as well.
Currently, three-quarters of insurers in the United States collect and manage their own data stores, whereas in Europe, which has a more mature UBI market, black-box OEMs offer collection and analysis services. Managing, transmitting, storing, scrubbing and analyzing the enormous quantities of data generated by UBI systems has proven to be a challenge for insurers or all sizes, Aite said, but especially for Tier-2 and Tier-3 insurers.
“Further, insurers must support a number of disparate telematics devices and platforms, and they must evaluate how to integrate the data being transmitted to existing systems as well as manage its use across functional business units,” Aite Group said.
Tier-2 and Tier-3 insurers likely will need to partner with turnkey, end-to-end package application vendors. As the UBI market has matured, however, more than 200 hardware and software providers have entered the space.
South Africa has the longest UBI history, and insurers with mature programs there use internal resources to collect and analyze the data.
In the United States, the 10 largest P&C carriers own almost 70 percent of the consumer auto insurance market, and considering both commercial and personal lines auto, nine of the 10 carriers offer UBI programs, are developing or piloting them, Aite said.
