Intuitively, it makes sense that using actual data that answer when, where, how and how often a vehicle is driven should be a far more accurate way to measure risk and price auto insurance than risk proxies, such as age and garaging location, which have been the norm for pricing conventional policies.
Progressive® Insurance, a usage-based insurance (UBI) pioneer in the U.S., certainly thinks so, having publicly stated that telematics data are significantly more powerful and have provided a step-change improvement in the accuracy of rating of drivers enrolled in its UBI program.
Analysis of our own UBI exchange data pool, DriveAbility, corroborates what they’ve found. The graph below shows a sample of drivers subdivided into risk deciles (with Group 1, the safest drivers, and Group 10, the riskiest). The bar heights show the expected loss cost for each risk group and the line represents the premium charged by insurers who weren’t using telematics data. The gap between the two illustrates the degree to which companies have under- or over-priced respective risks using traditional rating factors.
UBI – why not?
It would seem to follow then that UBI data should play a dominant role in rating algorithms, but right now they don’t. Why?
A big reason is that key data today are typically not available to insurers until after the initial UBI policy is underwritten and the insured installs the required OBDII (onboard diagnostics) sensor or app. The process alone can be a turn-off to those who think it inconvenient or who aren’t convinced that they’ll save much, or anything, on their premium.
It also creates issues for insurers. Generally, they are still using traditional factors to calculate a provisional premium that is subsequently adjusted pending a telematics-based driving score, while having to take care to avoid discount overlaps.
But hold on…
The vast majority of insured drivers already have smartphones, and 150 million connected cars are projected to be sold by 2020 in the U.S. alone. Automakers (original equipment manufacturers, or OEMs), telecommunication companies, mobile handset providers and location-based app providers, among others, either have or will have data for their customers. And increasingly, these data providers are actively pursuing ways to monetize existing data through insurance applications.
What does this mean for auto insurers?
To start, it means that UBI insurers may be able to offer quotes to individual drivers without first having a device fitted in the car or an app on a smartphone. Equally important, drivers will know if a UBI policy will benefit them before they buy one.
Furthermore, insurers able to leverage an optimal combination of expanding telematics data and traditional rating factors will have a significant competitive advantage attracting and retaining the most profitable business. They will also be able to use their historical databases to analytically build scores for emerging, less granular data sets as they become available.
Partnerships among auto manufacturers, aftermarket sensor providers, location-based apps and insurers continue to be announced almost daily. Such developments all point to enhanced, data-driven rating plans being the standard in the near future. Will you be ready?
Related article: Telematics data powers sizable auto insurance rating improvements
Geoff Werner is the Global UBI Leader for Towers Watson’s telematics based insurance offerings. During Geoff’s 25-year career in the insurance industry, he has specialized in personal lines pricing. Before joining our team, Geoff was a managing director for EMB in North America and held a variety of positions at United Services Automobile Association (USAA) and GEICO.