Usage-based insurance (UBI) is revolutionizing the insurance industry by providing a more personalized approach to pricing and risk assessment. Unlike traditional insurance policies, UBI utilizes cutting-edge technology to monitor policyholders' driving behaviors and offer tailored coverage. Initially, UBI faced challenges in collecting telematics data, creating inconveniences for both insurers and policyholders. The process involved cumbersome steps such as shipping a physical device, known as a "dongle," to policyholders for installation in their vehicle's OBD-II port. At the end of the monitoring period or if the policy was canceled, policyholders had to go through the hassle of returning the device to the carrier. While this method proved to be inconvenient and costly, advancements in mobile phone technology alleviated these issues. Carriers soon realized that they could gather the same data using the sensors in policyholders' smartphones, eliminating the need for physical devices. Policyholders simply had to download a user-friendly app, making the entire process seamless. The widespread adoption of mobile phones as the primary data collection method revolutionized UBI. It allowed carriers to gather crucial information about driving habits and patterns without the need for additional hardware. However, as technology continues to evolve, a new player is emerging: the connected vehicle.

Even just a few years ago, as many as 91% of new vehicles sold in the U.S. had connected capabilities, a number which will continue to grow until nearly every vehicle rolling off the assembly line comes equipped with the necessary hardware as standard.  Smartphones have become the main source of data for Usage-Based Insurance (UBI) policies, replacing On-Board Diagnostic (OBD) devices. However, there are some limitations with using smartphones. OBD devices are specific to a vehicle, while mobile devices track individual drivers. This can lead to errors, such as mistakenly identifying a trip as a driver when the person was actually a passenger. Mobile UBI policies generally require all individuals listed to participate in order to comply and receive the maximum potential discount. Device-based UBI, on the other hand, does not require all drivers or vehicles to be enrolled. Connected-vehicle UBI combines the benefits of both device-based and mobile UBI. It is tied to the car instead of the driver, removing the need for physical installation and reducing tracking issues associated with mobile devices. Additionally, it allows insurers to access more data points relevant to pricing compared to either device-based or mobile UBI.

While Usage-Based Insurance (UBI) programs traditionally assessed driving behavior based on metrics like acceleration, braking, and speeding, connected vehicles provide insurers with a wealth of additional variables to consider. However, it's important to note that more data doesn't always mean better outcomes. The value of new rating variables lies in their ability to accurately predict potential losses. This allows insurers to adjust pricing to match an individual's risk profile more effectively. For instance, fuel consumption may be essential to vehicle owners, but it might not have much predictive value in terms of insurance losses. However, factors such as seat belt usage, tire pressure, and the engagement of advanced driver assistance systems (ADAS) could be correlated with varying degrees of risk. External factors like weather and road conditions can also impact risk levels. Driving above the speed limit on a sunny day might be less risky than driving below the limit during a snowstorm, and braking hard on dry pavement is safer than doing so on wet or icy surfaces. We can also envision a future where UBI policyholders are rewarded for avoiding certain routes identified as unsafe due to a high concentration of accidents. As insurers continue to innovate, we can expect UBI scoring metrics to diversify further. One area where there is currently a wide range of approaches among insurers is the penalization of distracted driving, a major cause of accidents. Using a mobile phone for UBI data collection has an advantage in tracking this metric. Some insurers go as far as differentiating between handheld calls and active phone use (like texting) versus hands-free calls and passive phone use (like listening to music) to impose different penalties based on perceived levels of driver distraction. However, a limitation arises when it comes to distinguishing between a driver's use of a phone and a passenger's use, leading to the same penalty being applied even when the driver is not at fault.

Historically, many UBI programs were structured as discount-only models, meaning that policyholders’ rates couldn’t increase no matter how poorly they drove. Additionally, the monitoring period was usually limited to the first term and then no longer necessary for the remainder of the policy.  

However, it is becoming increasingly more common for carriers to add surcharges and also require continuous monitoring. By introducing surcharges, the insurer is able to have the policyholders’ premiums be more reflective of the actual driving behavior for those with low driving scores. The surcharges increase the likelihood of these higher risk drivers shopping and potentially finding a better rate with a carrier that possesses less sophisticated pricing abilities. Meanwhile, the best drivers with top driving scores earn the highest discounts and are more likely to retain and cause fewer losses for the insurer. 

In the early days of UBI, not only was the cost of the OBD device and its shipping expensive, but so were the data transmission and storage costs. Carriers were trying to incentivize consumers to adopt UBI programs by limiting the monitoring period and sometimes even including a small participation discount of usually no more than 10% to 15%.  

As data costs have been reduced to a fraction of what they were and the public has become increasingly more comfortable with tracking (at least when there’s a benefit to them), some insurers have moved from time-limited to continuous monitoring for UBI. With the time-limited programs (usually in the range of 3 to 6 months), policyholders are able to revert back to their old driving habits once the monitoring period has concluded and still receive the same discount for the life of the policy. But with continuous monitoring, the discount is repeatedly calculated based on more recent driving behavior so it can better match a policyholder’s rate to their risk and incentivize them to maintain good driving behavior on an ongoing basis. If they don’t, they risk losing their discount and could even receive a surcharge. 

With the developments in connected vehicle technology, the initial UBI monitoring period could even be eliminated completely and the insurer able to immediately apply the driving behavior discount or surcharge during the initial quote. It would essentially remove the uncertainty around what the discount might be since the policyholder wouldn’t have to commit to a 3-to-6-month monitoring period.  

OEMs are continually looking for new ways to monetize connected car data and one of those is to allow carriers to tap into it when a driver with an eligible vehicle begins an insurance quote. Of course, this requires the consumer to have had tracking previously enabled with their vehicle and a sufficient amount of driving history for the insurer to rate on. On the mobile side, some carriers are also finding success today by embedding themselves into popular consumer apps and tracking driving habits in the background with the user’s consent. Incorporating this data at time of quote is still very much in the early stages, and capabilities here vary widely by insurer, but expect the industry to keep pushing to shorten the time needed to collect and apply driving behavior to pricing.  

Beyond driving behavior, insurers may look to leverage additional OEM data to increase pricing sophistication relating to the specific vehicle being insured. During the quoting process, carriers can use the VIN to look up the vehicle’s installed options (such as those found on the manufacturer’s build sheet) to incorporate into the premium calculation.  

ADAS features like hand-free driving, adaptive cruise control, automatic emergency braking, blind spot warning, and lane departure alerts may reduce the frequency of accidents but could also drive up severity given the associated increased vehicle repair costs. We may even find that some of these safety technologies have a greater impact at reducing insurance losses than others, and that some manufacturers’ technologies are better than others, all of which should be reflected in the insurance premiums.  

In the next generation of UBI, policyholders could be rewarded for engaging certain ADAS (or perhaps penalized for them needing to kick in) as opposed to just receiving an initial discount for the vehicle having them installed. Savings on insurance could help to partially offset the subscription costs that automakers have started charging owners after the trial periods on some of these ADAS run out. 

On top of the potential for lower premiums, insurers are adding services and location-based experiences around UBI in attempt to lure more consumers to opt in. Some carriers are even making these available to all policyholders, even non-UBI, as long as they have tracking permitted on their mobile phones. One that is certainly complimentary to an insurance policy is automatic crash detection and assistance. In the event that an insurer believes a collision has occurred, it can reach out to the driver to ask if he or she is alright or in need of assistance. Some will even send emergency services if the crash looks severe enough and the insured was not able to be reached. While an ambulance may not always be needed, telematics technology can help to send a tow truck precisely to the scene of the accident. One can even see the opportunity to also bring a rental vehicle directly to the insured for an exceptional roadside assistance experience. 

After the detection of a crash, insurers can use the telematics data to help them begin the claims process, called first notice of loss within the industry (FNOL), and then settle them more quickly for UBI policyholders. When the insurer has data to support that a real collision has occurred, it reduces the potential for fraud and some of the other investigative steps that may otherwise have been required to verify that the claim was legitimate.  

A number of items such as location, date and time, speed, general driving behavior, and perhaps even dashcam video can all be automatically documented. As vehicles become more advanced, there may also be cases where the vehicle’s systems could have contributed to an accident, which can be recorded as well on a connected vehicle, and this may come to be important to prove who is liable. Based on how hard the hit was, the insurer could also be able to indicate whether they should expect any bodily injuries or if it’s likely to be limited to just physical damage of the vehicle itself, thereby routing the claim through the appropriate path internally. 

Beyond automatic crash detection and FNOL, other location-based services gaining in popularity are gas station and parking spot finding tools, repair shop locators, and weather alerts for things like hail which undoubtably can cause sizable auto insurance claims. The trend of insurers adding more features and services is likely to continue as they attempt to drive further policyholder engagement with their apps. 

  Learn more about Novo and telematics with articles on our blog, such as:   

• Novo Drive: The Driving Program for Generation Now  

• Auto Insurance: Transformation or Disruption     

• Insurance 101: What is Property Damage Liability

• Does Car Insurance Cover Vandalism?

Or check out helpful safety tips to help your ride and your wallet, via Novo Drive:   

• Your Car Emergency Kit, Explained    

• 6 Ways to Defend Yourself Against Drunk Drivers    

• Car Fires: Can it Happen to You?