Personal auto carriers are rapidly approaching a moment of truth when it comes to usage-based insurance programs. That goes both for insurers that have already launched telematics-based products, as well as those that for a variety of reasons have remained on the sidelines.
Early adopters of usage-based insurance (UBI) are gaining a wealth of firsthand experience and insights that stand to provide a long-lasting competitive edge against insurers that up until now have been undecided about whether or when to follow suit, as well as those either unwilling or simply unable to do so. Trailblazers are rapidly collecting a critical mass of data that can be analyzed to assess driver behavior and provide a basis for greater precision in underwriting and pricing.
For example, current rating methods would likely price two drivers identically if they had the same credit scores, automobiles, and demographics, while living in areas with similar geographic profiles.
However, what if we knew through telematics observation that one of the insureds drives their car one-tenth the amount of the other, at less risky times of the day, or on less populated roadways? In that case, an insurer would be in a position to potentially leverage this new experiential information and underwrite the respective risks posed by the two drivers differently, as well as price their coverage more accurately.
Having such first-hand driving data at their underwriters' disposal could give existing UBI carriers a considerable leg up over those not using telematics, should the non-users remain on the sidelines for long. For instance, standard carriers could lose profitable, safer-driving policyholders who are cherry-picked by UBI-capable insurers that are developing the ability to discern risk more granularly.
Meanwhile, trying to catch up to the frontrunners in the UBI race is also likely to be costly—even more so as time goes on and the early birds get a bigger head start.
Of course, early adopters still face many challenges in executing a viable telematics program. For one, widespread consumer acceptance is no certainty, given privacy concerns for some and skepticism among others as to whether having their driving so closely scrutinized will benefit them in the end.
Indeed, a January 2014 survey by the Deloitte Center for Financial Services exploring consumer use of mobile devices in financial services reveals that while about half of the respondents were willing to have their driving monitored if, by doing so, they might earn a premium discount, the other half is not open to UBI—at least not for the moment.
In addition, while regulators have been supportive in the early stages of telematics development, down the road their acceptance may depend on a number of factors, including the eventual impact on rates for those who fail to meet whatever standards are attributed to "less risky" drivers. There also may be regulatory resistance if drivers face higher prices just because they choose not to be monitored, for whatever reason.
Over our next few blogs, we'll explore these and a number of other important considerations for carriers that have jumped in and made a splash in the UBI market, based on our recent report, "Overcoming Speed Bumps on the Road to Telematics." But we'll also address the concerns of those who have not yet taken this path but are interested in doing so, offering a head's-up about how to overcome potential challenges when launching telematics-based products.
For example, we'll examine how carriers looking to follow the UBI leaders—but lacking the data, expertise, and/or capacity to create their own telematics programs—might leverage the capabilities of third-party information aggregators to level the playing field when going up against much bigger competitors with far deeper statistical pools at their disposal.
Last but not least, we'll explore how confirmed non-UBI carriers might compete against those offering telematics-based pricing and services.
Wherever a carrier stands on the subject, we may have already reached the point of no return when it comes to telematics and UBI. The genie is out of the bottle. The industry as a whole is not likely to go back to relying only on traditional methods of assessing auto risks. A growing number of insurers will likely adopt behavioral-based telematics as a way to at least supplement standard underwriting factors.
Indeed, before too long the use of sensory technologies that permit behavioral underwriting by insurers is likely to be expanded beyond auto insurance into homeowners, life and health coverages, and perhaps even non-auto commercial lines as well, such as workers' compensation. Smart homes, biometric monitoring, wearable technologies, and the "Internet of Things" are all developing trends that could support and accelerate such telematics initiatives.
But even if UBI is merely part of the natural evolution of auto insurance underwriting in an increasingly data-driven age, carriers of all stripes will likely need a strategy to respond to those that embrace telematics. Some will decide to go along for the ride, while the rest will have to figure out alternative routes to survive and prosper.
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