For the moment, most carriers may have insufficient data to say for sure what the ROI on UBI will be when all is said and done. We are still in the exploratory stage, as individual insurers and third parties collect a critical mass of actual driving data, analyze it, correlate it to the likelihood of a loss, and leverage that information for more precise underwriting, segmentation, and pricing decisions.

However, that's not to say that auto insurers thinking about entering the telematics market are driving in the dark without headlights. To the contrary, there are already some clear benefits for carriers to consider both in terms of increased revenue and lower expenses that could indeed have a big impact on an insurer's bottom line right away.

For example, when it comes to enhanced revenue opportunities, consider the following:

• Risk-tiering: UBI carriers will have more first-hand data on driver behavior, facilitating improved risk segmentation. They should be better able to identify high-risk drivers and adjust premiums to reflect actual performance behind the wheel.
• Product innovation: Insurers could employ telematics to unearth new potential target markets by analyzing driver behavior. They could also create new products tailored to micro-segments, and increase the breadth of product offerings available to their agents.
• Marketing and service enhancements: Carriers could leverage UBI to offer more value-added services, such as automatic emergency response and parental monitoring capabilities. They could create new cross-selling opportunities for existing product lines, and perhaps develop targeted external partnerships to offer related coverage and services, especially when drivers are monitored over a mobile app.
• Higher retention potential: By setting up a telematics connection via a driver's smartphone, insurers can increase customer engagement by creating a direct, two-way dialogue with policyholders that goes beyond routine interactions for claims and renewals. They could bolster brand loyalty by rewarding safe driving behavior, and perhaps employ gamification to enhance the value of a UBI policy.

Meanwhile, auto carriers could reduce their expenses with UBI by:

• Lowering loss costs and loss-adjustment expenses: Insurers could use telematics data for more timely first notice of loss during the claims process. They could also reduce the volume of claims processed by prompting policyholders who know they are being monitored to drive more safely, as well as by offering safe driving discounts to those who are more careful behind the wheel.
• Decreasing acquisition costs: UBI carriers may be better positioned to win over good drivers from rival carriers that do not offer a telematics option.

Over the short term, UBI carriers might have to absorb some upfront investments to launch a telematics program and foster its initial growth. The old axiom that one has to spend money to make money extends to telematics as well. But as insurers gather more data and develop advanced analytics to connect the dots, they should be able to more accurately predict loss potential and price risks with greater confidence, thus improving their bottom line.

In addition, while the long-term impact on ROI is difficult to predict, watching and waiting or sitting out the UBI trend entirely may also have its costs. Non-adoption could undermine profitability for carriers if it means seeing their best drivers cherry-picked by rival insurance companies offering lower premiums for signing up with a UBI program, and retaining those customers with enhanced, telematics-based services.

For more information about telematics, including a recap of Deloitte's consumer research into the market and operational considerations for UBI, see “Overcoming Speed Bumps on the Road to Telematics.”