The oldest challenge in business, both inside and outside the insurance industry, is how to get a positive return on investment.
When it comes to telematics and usage-based insurance (UBI) programs, that’s not always easy. Some believe, based on early industry experience, that it’s a “spend more to make less” proposition.
In the U.S., many early programs launched with a discount for good driving. This is likely where the “spend money to make less” argument originated. Because the insurer carried the full costs of the program, if price was discounted, then the only place to find positive ROI was on the cost side.
Contrast that with the EU and other parts of the world, where UBI programs tended to focus on marketing other value-added services consumers wanted – like theft recovery, safety programs, etc. Their pitch was not about explicit price discounting but as a value to customers — and it resulted in incremental revenue.
There is general agreement on UBI’s potential:
The industry looks at the revenue-generation side, which is based upon areas such as:
- Acquisition of low/lower risk drivers
- Increased retention and customer engagement
- Personalization of value-added services for customers
- Improved pricing of risk/underwriting
The industry looks at the cost-reduction side based upon the following areas:
- Reduced frequency and severity of claims by encouraging better driver behavior
- Reduced claims processing costs due to more accurate and prompt claims fulfillment, improved accident reconstruction and reduced fraud
- Marketing efficiency due to micro-segmentation and digital targeting
A well-designed UBI program then, fully aligned with your customer needs, will produce positive return by both increasing revenue and lowering costs. Milliman, a leading provider of actuarial and related products and services to the insurance market, decided to test this idea.
We took a very conservative approach to estimating ROI that factored in a little bit of growth in the customer base along with typical discounts, the costs of building the program (dongles, software, etc.) and reductions in insurers’ losses like reduced fraudulent claims, reduced payouts, claims processing times and claims not submitted.
The estimated ROI was positive but the majority of the return is from insurer cost reduction, not increased revenue. Specifically, the incremental revenue does not fully offset the costs of both the program and the discounting. The positive return comes from reducing the insurer’s total payout. It’s a combination of a better risk pool, using the program to effect driver behavior to get fewer claims and finding claims processing efficiencies.
By analyzing the levels of loss (to the insurer), the insurer can then better assess where they are losing money from certain types of policy holders and where they can better price their policies or even where they should avoid insuring certain types of drivers.
To be sure, the details and specifics from an individual insurer will change the actual ROI estimate, but the strategic imperative, the changes happening in customer expectations and the business case tell us the time is now.
James Dodge, Senior Consultant, Milliman, is leading the development of the Advanced Analytics and Data Solutions Practice at Milliman, where he focuses on the creation of new capabilities and capacity that Milliman Practices can leverage as they serve clients’ rapidly emerging big data, machine learning and advanced analytical needs. He joined the firm in early 2016.
Milliman is an independent actuarial and consulting analytics firm that has developed some of the leading UBI-related actuarial knowledge. CSC has partnered with Milliman and Scope Technologies on its Usage-Based Insurance (UBI) solution.