Usage-based insurance (UBI) has been gaining ground for some years now, and while the jury is still out on some other domains such as health insurance, results in car insurance are very promising. Nevertheless, not all insurance companies are jumping at the opportunities UBI is presenting.
For many businesses, the dual effort of upgrading their technology and reviewing their business models on their own seems all but unmanageable. An implementation partner with expertise in the fields of both IT and actuarial matters can help.
The benefits of usage-based insurance are obvious:
- Insurers would not only benefit from the significantly reduced number of claims, but moreover, from promising up-selling and cross-selling opportunities
- UBI policyholders would enjoy lower insurance rates
- Society as a whole would ultimately benefit in terms of improved road safety, which would in turn give the public image of the insurance sector a massive boost
However, cultural barriers seem to exist, making it difficult for customers in some markets to embrace the idea of having their behaviour observed too closely. While such initiatives meet relatively little controversy in countries such as the U.S. and Italy, German customers are known to take privacy concerns very seriously.
The shift from “Pay As You Drive (PAYD)“ to “Pay How You Drive (PHYD)“ appears to cause anxiety among drivers, who are hesitant about having their whereabouts uploaded to an anonymous IT system. After all, who can guarantee that law enforcement agencies will not gain access to traffic violation data once documented (or that a spouse might find out her partner didn’t attend that conference after all)?
Still, there ought to be a target group with no such qualms. Moreover, experiences from other sectors show that some consumers are prepared to give up their privacy rights in return for surprisingly little rewards.
Yet, insurers foster their own set of concerns:
- Telematics not only necessitates significant changes to the insurers’ technology environments, but also requires them to partner up with external telematics service providers, with whom the profit will have to be shared.
- In view of a large part of the low-risk customer base already being captured by early adopters, there’s a growing concern that the remaining safe drivers out there will be difficult to acquire.
- Once the monitoring technology is installed in all new cars, the question as to who owns or gets access to the collected data will have to be negotiated with the automakers.
- Last but not least, the technology is still costly. As long as the entire systemic array — including devices, data communications, mobile app, infrastructure, data management and other core system components — remains expensive to implement and operate, it may only be affordable to larger insurers, leaving smaller players behind.
However, in the long run, car insurers all over the world will have to open up to the opportunities that digital transformation is offering. The necessary telematics technology used to verify driving behaviour, and more precisely determine dangerous areas, is basically mature and is broadly perceived as an effective means of improving road safety. Within a decade or so, such systems will most likely be standard.
Insurers should not postpone the introduction of UBI much longer lest they risk finding the market left with only high-risk customers to acquire.
What needs to be done?
Until all cars are equipped with built-in telematics technology, interested insurers must first make a technology decision.
Alternatives range from simple mobile phone apps to so called dongles, which are plugged into the car’s 12V power outlet to enable the transmission of operating data. Finally, data transmitting devices can be connected to the OBD-II interface, which provides additional information that neither dongles nor mobile phones can produce. Each technology is marked by its own characteristics in terms of cost, implementation effort and accuracy of the captured data.
The next step will be to develop new insurance products based on these parameters, which should be tested in small-scale pilot programmes. Once the data is captured, insurers need to decide whether they wish to integrate the UBI solution into their existing IT landscape or rather go for hosted services or even full business process outsourcing. Only then can they begin to market their new policies and to compete for new and willing-to-change customers.
Determining the best path involves developing a clear business plan with short- and long-term goals. For many companies, conducting a workshop – led by telematics experts – will be a logical first step. In the process, they can also establish whether the project is meant for information gathering with a short time horizon or for filling an immediate need to build a robust solution for the longer term.
Few insurers, though, can be expected to have the required expert and technology resources at hand. Those who do not have such resources, need to find a partner who not only has technological expertise but also understands the insurance business in depth and can even help with the finer details of actuarial science. Identifying the right partner may be the first challenge to tackled, but it is probably not a very hard task as there are not many providers in the market who can deliver all of this at once.