A telematics data exchange can significantly accelerate innovation in usage-based insurance (UBI) by making the exchange of driving data more convenient for drivers, insurers, and automakers. With its capacity to make driving history more portable, a data exchange also has societal implications that may change the nature of vehicle ownership as we know it.
Reduced cost of ownership: A telematics data exchange can facilitate UBI programs, which typically offer price incentives to consumers who adopt safer driving habits or reduce their mileage. If insurance premiums were to be based on how a consumer actually drives or on annual mileage — rather than on traditional proxies that consider age, gender, marital status, make and model of vehicle, and so forth — the cost of auto insurance could potentially decline.
According to Edmunds.com, an automotive pricing guide, Auto insurance accounts for 10% of overall five-year vehicle ownership costs, so such savings could be meaningful. In addition, there could be a correlation between fewer miles driven and/or safer driving and other societal benefits, including reduced accident rates, lower vehicle emissions, and lower air pollution levels.
Driver safety: By participating in a data exchange, drivers can receive feedback on their actual driving behavior through data collected from their vehicles, which is then transmitted to the exchange. This can flag their unsafe driving patterns and potentially encourage them to modify their behavior on the road. Improving driver safety and reducing accident rates are also priorities for insurers. Society also benefits from safe driving, especially in light of a new National Safety Council (NSC) report, which indicated that 2015 witnessed the largest percentage increase in motor vehicle deaths in 50 years. The NSC also reported that 38,300 people were killed on U.S. roads last year, and 4.4 million more were seriously injured.
Ease of insurance shopping: Many consumers shop for competitive quotes through online programs. But driving history information cannot be easily transferred from a current insurer to another insurer when a consumer is renewing a policy. So, when consumers switch to another insurer, the insurer must gather their complete driving history all over again. If driving history were readily available in the form of a portable driving risk score that is based on personal driving behavior — which a telematics data exchange can provide — the consumer's renewal shopping experience can be made smoother.
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UBI programs typically appeal to millennial drivers (those born between 1982 and 2000) and reflect this generation's general concerns about paying a fair price for insurance. (Photo: Shutterstock)
Marketing to new segments: Telematics offers insurers the ability to generally focus their resources in tailoring specific insurance products to attract and retain various categories of drivers (safe drivers, urban dwellers, millennials, and so forth). Such programs include pay-how-you-drive, pay-as-you-drive, manage-how-you-drive, and distance-based insurance — all of which generally fall under the UBI umbrella.
UBI programs typically appeal to millennial drivers (those born between 1982 and 2000) and reflect this generation's general concerns about paying a fair price for insurance. Telematics and UBI programs provide tools that can help insurers price risk based on actual driving data, as opposed to using some of the traditional proxies that may potentially place millennial applicants in a higher risk class. Millennials may therefore perceive a UBI program to be more equitable or as better serving their needs. In addition, safe-driving feedback offers insurers an opportunity to engage and educate their millennial customers in a unique way and potentially encourage improved driving performance.
Pricing risks more precisely: Currently, premium discounts on traditional auto insurance are usually limited to the bundling of insurance for multiple vehicles or types of insurance (for example, home and auto), protection devices (such as antilock brakes, airbags, and the like), and defensive-driving courses. UBI uses individual and current driving behaviors — rather than relying largely on aggregated statistics and driving records that are based on past trends and events — making premium pricing more individualized and precise. As the chart below illustrates, UBI, with its emphasis on actual driving data, supplements traditional proxies and can be a factor in assessing risks more precisely.
Chart developed with data from the Verisk Telematics Safety Scoring program. The program monitors driver behavior and provides a risk score that underwriters can use to provide discounts for safe drivers. To develop the risk score, the program tracks every driving trip to identify risky driving behavior, such as fast breaking and cornering.
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