Should UBI remain a niche auto insurance market?
Drivers who allow their performance to be monitored remain the exception rather than the rule.
You would think usage-based auto insurance would have really taken off by now, especially given the way most people routinely record just about everything else they do in life, either automatically with wearables or reflexively on social media. Yet drivers having their performance monitored in real time to determine the price of coverage remain the exception rather than the rule.
Usage-based insurance (UBI) can track whether policyholders speed, take turns too sharply or stop short too often, the kinds of conditions they drive in, and even whether their vehicles are properly maintained. It seems intuitive that such granular, experiential information should beat pricing based on more generic proxy data beyond a consumer’s control, such as age, home address, type of vehicle, level of education, or credit history.
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Slow adoption
Yet UBI remains a relatively small niche market. Exact numbers of users are hard to come by, but one leading auto carrier at a symposium I attended this past spring put the total number of connected drivers at about 5% for North America. Globally, only Italy appears to have just barely cracked double digits, those at the symposium noted.
So, why hasn’t UBI caught on with a much wider customer base, and what are the implications for insurers? Overcoming technological, marketing, and distribution challenges posed by UBI isn’t easy, according to participants at the recent “Next Gen Analytics and IoT: Powering InsurTech” symposium, organized by the Center for Executive Education at St. John’s University in New York City. Panelists and attendees representing incumbent carriers, InsurTech disruptors, and telematics service providers shared war stories and offered opinions about why UBI hasn’t been more widely adopted among U.S. drivers.
Stalling out on the information superhighway
From an insurer’s perspective, the business case to collect detailed information showing how well policyholders operate vehicles appears to be self-evident, as being a “backseat driver” should give connected carriers keener insights into how likely policyholders are to get into an accident. Yet from the buyer’s perspective, the possible reward purely in terms of lower premiums for UBI may just not be compelling enough for the vast majority of drivers, especially given the additional steps that need to be taken to get on board.
The obstacles to faster UBI growth are at least threefold:
- Buying a standard auto policy requires very little of the insured, beyond checking boxes on an application. Taking on UBI, on the other hand, means having to install a new device in your car or figuring out how to activate one already included by the manufacturer. The alternative of simply downloading an app may overcome such objections (if that option is available), but that also makes the coverage dependent on everyone driving the car putting the app on their mobile device and registering with the program. Meanwhile, if there are any problems installing or activating the technology, aggravation is likely to ensue for the consumer, as well as the unfortunate agent or customer service rep who fields their complaint.
- As noted by symposium participants, people generally don’t ask their agent or carrier for UBI unprompted. They need to be sold on the idea. The logistics and value proposition must be explained to them. Those are extra steps for agents selling auto insurance, where commissions are already relatively low (especially for UBI policies, which usually start with a substantial discount to attract new prospects). As for consumers buying coverage direct online, without an agent to force the issue or explain the nuances, UBI adds a level of complexity to an otherwise straightforward transaction.
- There may yet be reliability issues with the technology itself. For example, I heard at the symposium that if a driver goes under a bridge or overpass, the telematics monitor may register that as a hard stop, possibly deducting points off the policyholder’s score.
Bright spot on the horizon
Ultimately, resistance to UBI could come down to drivers considering the whole package and simply asking, who needs the hassle?
Given these challenges, it’s no wonder this market is developing so slowly. But should UBI insurers be terribly concerned about such growing pains? I would think not. Indeed, the obstacles outlined above should only be problematic if the goal is universal monitoring of policyholders. However, if the primary objective is to attract and retain the best drivers generating the fewest insured losses, these barriers actually might serve as a culling process, separating the wheat from the chaff.
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Common sense suggests that the majority of those who consider themselves truly superior drivers wouldn’t necessarily let minor speed bumps stand in the way of a substantial UBI premium discount (which carriers at the symposium indicated can run as high as 20% when the policies are first issued). If telematic monitoring proves they are good drivers, insurers should be pleased to put these prime policyholders on their books, as claims costs would likely go down. If a particular policyholder is mistaken about how ably he or she drives, that, too, should show up via telematics, and the premium could be adjusted accordingly, with a clear rationale provided for any increase. For cases in between, or to account for anomalies, the discount could be lessened but not eliminated entirely — a fair compromise while more data is collected.
For the time being…
Perhaps insurers should focus on analyzing and leveraging the massive amount of telematics data already produced by this niche to perfect their UBI-based models and prepare to defend pricing decisions to consumers and regulators down the road. Regulators haven’t yet made much of a fuss over UBI because pretty much everyone who signs up gets a discount. But what happens if poorer drivers see their telematics data used to justify higher than standard rates? Might insurers one day even decide to automatically add a surcharge for those who don’t accept monitoring? At some point, insurers will likely have some explaining to do, and will need strong correlations to validate their UBI programs.
Longer term, insurers should avoid falling into the trap of focusing on price alone in marketing auto insurance in general and UBI in particular. To convince more drivers (even average or poorer ones) to go the UBI route, insurers need to get the word out that the potential for a lower premium is only one of many benefits, and not even the most important. By using telematics to help drivers improve their performance and avoid accidents, UBI may literally be saving lives—those of policyholders and their loved ones. Now, that’s a compelling message for insurers and agents to market!
In the meantime, insurers can console themselves that those who take a pass on UBI are very likely paying a higher premium than their monitored counterparts, regardless of how well they drive. If word gets around, that reality check alone may help convince more drivers, particularly the better ones, to take the leap of faith and see how they measure up via telematics.
Former National Underwriter P&C Editor-in-Chief Sam J. Friedman (samfriedman@deloitte.com) is now insurance research leader with Deloitte’s Center for Financial Services in New York. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn. These opinions are his own.
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