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, some insurers have moved from time-limited to continuous monitoring for UBI. 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.
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.
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. 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. 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.
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. 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.
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.
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.
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