Several well-meaning experts in this space have written about the unsustainability of usage-based insurance (UBI) programs due to high costs and low returns. They argue that when you add up all of the acquisition, technology, and administrative expenses, as well as premium discounts or other incentives, insurers would need to see a significant (read unrealistic) decrease in loss ratios just to “break even.” I’ve seen figures as high as 25 percent.

This line of thinking assumes that insurers are evaluating their UBI programs with the same set of criteria they use to evaluate any new business initiative, which is some variation of a return-on-investment (ROI) formula using future cash flow analysis and managing to a minimum required threshold set by the Chief Financial Officer. Sound familiar? Optimally, the decrease in loss ratio will be supplemented by an increase in policyholder retention and market-share growth, which in time would allow you to manage to your ROI objective.

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