Usage Based Insurance

The evolution of an online sales culture prompts technological solutions to highly competitive markets, like auto insurance. As a result, some predict that usage-based insurance is poised to take off in North America —to the detriment of some, and the benefit of others.

Auto insurance is a competitive business. That competitiveness, heightened by the advance of aggregator websites, has made it increasingly difficult for insurers to maintain margins when writing this once profitable product.

In an effort to stay competitive, a few companies north and south of the 49th parallel have launched usage-based insurance (UBI). Through the use of improved technology and data analytics, UBI, otherwise known as pay-as-you-drive (PAYD) is a type of automobile insurance where the policy and premiums are dependent on the type of vehicle used, measured against time, distance and specific driving behaviours. It differs from traditional auto policies that differentiate and reward safe drivers only based on the absence of claims and violations.

Currently, only a few companies in the US or Canada publicly sell UBI products—Aviva in Canada and Progressive in the U.S. Many other insurers are exploring an expansion of their products to offer UBI, as it can be a competitive differentiator.

Canadian insurers have a few advantages to the adoption of this policy type, as they do not have to content with patents, a problem that U.S.-based competitors face, and because the demographic make-up of the country situates the majority of Canadians in a few urban markets thereby reducing the need to customize the policy too much, based on geographic location.

Still, despite the hurdles a number of UBI trials are taking place in the U.S. The most extensive programs have taken place with organizations such as the Texas Government pilot, General Motors, Travelers, Safeco and American Family; all of which have been involved in various monitored driving and low mileage discount programs. Just last year, after piloting various technologies in nine states, Progressive Insurance announced a U.S. nationwide roll-out for its UBI technology: MyRate. This uses the more straightforward technology of a device that plugs into the standard on-board diagnostic port (OBD II) of the vehicle.

The Technology Behind UBI

Beyond the distance-based products, most UBI applications use one of two technological platforms.

The first system is based on the installation of GPS tracking systems in vehicles. The GPS feeds information back to data centers. This system allows the carrier to measure risk factors including road type, time of day, driving style and preferences; all of this helps to improve risk assessment and price accuracy.

Unfortunately, the set-up costs for this type of system have historically been relatively high, which jeopardizes the narrowing margins that exist in the competitive auto insurance market.  Some insurers are exploring expanded services using the GPS capability to provide additional safety features as a means to offset the costs.

The second technological platform involves self-installation in the OBD II port. Using a device in the on-board diagnostic port enables insurers to eschew location-based data in favour of information about driving behaviours such as time of operation, acceleration, braking and lateral forces. The thinking here is that the risk exposure is correlated with the intensity of decisions and driving actions (which is consistent with the relative road risk findings). Working without location data is seen as less invasive and reduces the expense of UBI rating while still offering improved risk assessment.

However, the greatest obstacle to consumer acceptance of this technology has been obtaining compliance for the transmission of data to the insurer. From prior tests it is clear that few insureds will actively transmit the data, prompting the need for some form of wireless transmission.

Opportunities and threats

From the insurer’s perspective there are many issues to consider and some are seen as larger barriers to adoption than others.

  • PRO: The falling cost of technology

    Perhaps the biggest factor working in favour of UBI is the falling cost of technology. Everyone is familiar with the reality of “Moore’s Law,” which states that computer processors double in power every eighteen months. Similar observations have been made about data transmission capability and data storage. At the same time, computer costs are reducing in real terms. These trends directly extend to UBI hardware and data transmission. Costs have already dropped significantly and economies of scale have only just begun to be tapped.

  • CON: Cracking the installation nut

    With hardware costs falling, an increasing cost element has been installation; getting a fitter to the vehicle with the right device and wiring it discretely and correctly. Add to that the fact that people change their cars regularly, and moving a device from one car to reinstall in another is twice the amount of work, and it becomes clear that labour-intensive installation is not a viable option for the mass market. The OBD devices can be mailed to the customer and simply plugged into the OBD II port—a standard in most cars since 1996. Moreover, when people change cars, the UBI device can be unplugged from one and plugged into the other.

  • PRO: Self-selection

    UBI coverage will be an optional product for the foreseeable future. Those drivers that opt to use a UBI product will be those who correlate driving behaviour with the ability to save money on their insurance and are motivated more by the opportunity to save than by privacy concerns. As optional coverage, this enables earlier adopters to continue the evolution of their product, perhaps giving them a competitive advantage over insurers who are slower to provide policyholders with the UBI option.

  • CON: Vocal opponents

    Some commentators have questioned the Big Brother effect of the UBI enabled devices by both private companies and governmental organizations. By making this product optional, insurers are able to blunt this criticism.

  • PRO: Public policy

    UBI impacts many aspects of transportation public policy. From a governmental point of view, UBI assists widely supported objectives for reducing road use, lowering car emissions, minimizing road casualties and improving emergency response in the event of an accident. For this reason, regulation impeding the use of UBI applications is likely to be minimal.

    In the U.S., only a few states have passed specific laws to regulate UBI, and most of these laws do little (if anything) to interfere with the growth of this product. Only two states, California, where regulation will probably restrict the common usage of UBI, and New Mexico, which has publicly stated opposition to the use of this technology, have erected regulatory obstacles to UBI usage.

  • PRO: Customer care

    The benefit that insurers can offer UBI customers goes beyond individual pricing. Improved services for emergency roadside assistance, breakdown and recovery, and replacement vehicles are all made possible.

    Dependent on the technology used, UBI also offers the possibility to support witness statements and to track a stolen vehicle to assist in its recovery.

  • PRO: Reduce claims fraud

    Having details of the time, speed and driving actions can have a significant impact on insurers’ ability to handle claims accurately. Fraudulent whiplash claims from third parties, for example, have been successfully challenged with the demonstration that the collision was at a snail’s pace. Disputes over liability will be simplified.

    Early adopters in the U.S. and the UK are already beginning to see the fruits of their labour as UBI use catches on in those countries. The major obstacle to large-scale success of UBI insurance to date—the cost of the technology needed to make it work—is gradually being lowered. As a result, UBI is poised to become a standard product offering for many insurers over the next five years.

Robin Harbage, a C-counsel consultant with EMB in North America, has more than 28 years of experience in the P&C industry.  

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