Tag Archives: TSP

Is Usage-Based Insurance a Bubble?

In May 2015, the British Insurance Brokers Association (BIBA) released research showing the figures of usage-based insurance (UBI) in the UK. The research showed that the number of live UBI policies is just under 323,000, which represents only 9% growth from 296,000 UBI policies in December 2013. That figure is well down from the annual growth in 2013 of 64%, and of 80% in 2012. The decline could be understood if the market had reached its apogee, but the market is far from that. Another piece of research shows that the penetration rate of UBI in the UK is only 3% of the total.

The UK is considered to be a mature market for UBI, and the figures in other mature countries are not different. In other countries, even in most developed Western European countries such as Germany, Netherlands, Belgium, Austria and Scandinavia, the penetration of UBI is much lower.

If one can measure risk factors — certain road types, road environment, time of the day, days of the week and driver behavior– it is possible to assess high risks. Telematics enables insurers to assess their risk much better than the traditional proxies, and we could expect much higher adoption of insurance telematics.

So, why it is not the case? Why hasn’t UBI fulfilled the expectations?

UBI BENEFITS

So much has been spoken and presented in telematics conferences about the benefits and value of UBI for both the consumers and the insurers. Just to mention a few:

For the insurance company:

  1. Better assessment of the risk, enabling appropriate pricing
  2. Self-selection of “good” drivers
  3. Attracting safe drivers from the competitors
  4. Developing and strengthening direct relationship between the insurer and its customers
  5. Lowering the risk by advising the customer to drive safer

For the insurant:

  1. Discounted premium (for “good” drivers)
  2. Safer driving
  3. Geo-fencing tools and young-driver monitoring

Let’s examine honestly –

  • Do the above benefits “work” in reality?
  • Does UBI provide enough value to the customer to attract her to be connected and give up privacy?
  • Does UBI provide enough value to the insurer and justify the high investment?

We have to admit that the answer to all those questions is “No.” In other words, it seems that the current business model of UBI is wrong. Neither the insurant nor the insurer gets enough value to make UBI mainstream and a success story.

Let’s imagine a utopian scenario, where 100% of the customers agree to be “connected.” Could the insurer monetize that connection? Could the insurer return the investment it made in telematics (capital expenditures and operating expenses)? The answer is probably “No.” As long as the insurer has to encourage “good” drivers through premium discounts, and is unable to reject or levy a surcharge on “bad” drivers, the insurer cannot see the ROI. We heard voices from several insurers about surcharges for risky drivers, but it doesn’t work in reality. Those customers will simply churn to the competition.

As for the customer, discounted premium was not proven to be strong enough to “connect” customers and get them to give up their privacy.

IS UBI A BUBBLE?

The above draws a gloomy picture. However, the fact is that we see more and more conferences around UBI and new vendors joining the game. Is it a bubble that is about to explode?

Not necessarily, but there is a need for a radical change in the business model.

The connected car is much more than UBI. Therefore, the existing model where the insurer collects the driving data, owns it and uses it for insurance purposes only (underwriting, marketing and claims management) is completely wrong. The insurer cannot see the entire picture of connected car services, and, honestly, most of the insurers are not interested in more than insurance.

So, what is the right way to make the connected car a success story, and UBI part of that success?

KEEPING THE CUSTOMER ENGAGED

To encourage dolphins to do their show, you must feed them with fish continuously. The same is with customers – if you’ll pardon the analogy. You must keep them engaged and provide them monetary value on a daily basis, so they will be intrigued enough to be “connected.” A very good example is the “rewarding” method of Wejo, where a customer collects miles and good scoring and can redeem it for free coffee, car wash, etc. When a customer feels that he gets real value, he is more likely to give up privacy.

UBI AS PART OF A BROADER SUIT OF TELEMATICS SERVICES

Insurers that offer additional services, such as roadside assistance and extended car warranty, can use the telematics device in those services. In that case, insurers can either cover the costs by the customer or spread the cost over the several uses and justify the investment.

A WINNING ECOSYSTEM

As mentioned above, insurance companies cannot see the entire connected car picture and therefore are not the ideal entity to collect and own the driving data. Moreover, as long as they cannot reject or levy a surcharge on “bad” drivers, why would insurance companies fund telematics (devices, connectivity, device management, data analytics) for those customers, if they can purchase a database of “good” drivers from a third party?

Therefore, we can expect in the near future to see the rise of telematics facilitators/aggregators that will collect data from the vehicle and own it, providing value and engagement to the customer and forming a winning ecosystem of multiple players that can benefit from telematics data and insight. Once they have a mass amount of data, they will be able to driver behavior analytics and monetize it for insurance companies.

What will be the profile of such facilitators/aggregators? Obviously, OEMs can play this role for embedded OEM devices. In the aftermarket telematics, we already see some cellular operators that are heavily involved in the connected car space, and we can expect more to come. Other optional players may be existing TSPs and UBI vendors that will see the potential in a multi-player game, as well as new entrepreneurs.

The bottom line is that UBI is here to stay, but its business model will radically change.

How to Remove the Roadblock for UBI

Once upon a time, the auto insurance industry relied on motor vehicle reports, drivers’ records, business addresses, financial credit reports, claims histories, policyholder-stated VIN and mileage information, etc. to make an underwriting and rating decision. This scant information provided a fuzzy picture of risk, at best, so insurers built in a pricing cushion to protect against losses and figured it all out at the end of the year.

Fast forward to today, and insurers have volumes of real-world driving data at their fingertips to inform more precise underwriting and pricing. With the proliferation of telematics devices, whether after-market or factory-installed, and mobile tracking and recording apps, we now can know where, when and how an individual vehicle is driven. We can know area and hours of operation, driving behavior, route histories, vehicle performance characteristics and much, much more. We can even re-create collisions using the data.

With data-driven usage-based insurance (UBI), we now can formulate a clear picture of driving risk and remove the guesswork. In short, we have the potential to write for a group of one, based on observable, verifiable data.

Some numbers to consider:

  • Currently nearly 30% of all commercial vehicles have some form of telematics device installed. This figure is expected to reach 70% in 2017. (C.J. Driscoll & Associates)
  • Today’s telematics devices record nearly 300 billion miles of driving data annually.
  • 94% of all small businesses report using smartphones in their businesses. (2014 AT&T-SBE Council Small Business Technology Poll)
  • Approximately 30 auto manufacturers (original equipment manufacturers, or OEMs) are busily equipping vehicles with data devices today.
  • More than 70 telematics service provider (TSP) fleet management services companies in the U.S. are equipping trucks, cars and utility vehicles with telematics.
  • More than half of small fleet managers are likely to stay with their current insurance carriers if their insurer offers UBI (Lexis Nexis’ 2015 Commercial Usage-Based Insurance Study)
  • Global sales of insurance telematics products are projected to grow at a compound annual growth rate (CAGR) of 80% from 2013-2018, and the subscriber base is expected to reach 85.5 million in 2018. (Research & Markets).

We are quickly reaching a tipping point for UBI programs that rely on data collection and analysis as the basis for a “pay how you drive” approach to auto insurance.

However, insurers looking to take advantage of this driving data face some tough questions: Where does all this data come from? How is it collected? How can different data sets be normalized? How can insurers store, analyze and manage such a huge volume of data?

The solution for insurers large and small very likely will be a telematics data clearinghouse.

Multiple Data Sources: OEMs, TSPs, Mobile Apps and More

The first problem insurers face is negotiating with 70 different TSPs and 30 OEMs for their data, which adds complexity, time and expense to the process of acquiring the driving data needed for an effective UBI program. A clearinghouse solves the problem of accessing data on millions of vehicles by aggregating data from available sources. Rather than negotiate with dozens of data suppliers, an insurance carrier merely subscribes to the clearinghouse for access to all of that data, at a single price. 

Multiple Formats: Not All Data Is the Same

With so many data sources, each using different telematics devices and software, pulling data from different types of vehicles, the aggregated data is a jumble of formats, with no two data sets the same. A clearinghouse plays a critical part in scrubbing, authenticating and normalizing this data for handoff to underwriting.

Making Big Data Digestible… One Byte at a Time

UBI represents a monstrously big IT effort for an individual insurer. With nearly 300 billion miles of driving data available, we’re talking about petabytes of data to acquire and analyze. Even the largest insurers must weigh the benefits of devoting precious IT resources to developing and running a complete UBI data collection, storage and analysis effort. In contrast, a clearinghouse is built to manage big data in a big way, delivering a clean, authenticated data set to the insurer, integrated seamlessly into the underwriting process for easy access and use.

Evolution of a Safe-Driving Scoring Standard

With access to data from millions of vehicles, a clearinghouse is also able to provide comparative analytics and calculate a fleet’s safe-driving score, the driving equivalent of a FICO financial credit score and a much more accurate predictor of risk. A complement to current driver score cards offered by many TSPs (which measure individual driving behaviors such as speeding, harsh braking and hard cornering), a fleet score factors in all drivers, as well as the vehicles they drive and the environment in which they drive. The fleet score analyzes variables including weather, time of day, road surface and traffic dynamics. An overall fleet safety score compares fleets of similar SIC codes and territories to derive an indexed score and ranking – a meaningful risk assessment and underwriting tool more powerful than anything else in use today.

Data Privacy and Protection: Permission-Based

Yet another crucial role played by a clearinghouse is data protection and privacy. Clearly, the vehicle owner owns the data generated by that vehicle in the course of a driving trip. But once it is in the UBI transaction chain, how is that data protected? Who sees it, and what is done with it? The clearinghouse serves as gatekeeper. With the consent of the vehicle owner/policyholder, the clearinghouse facilitates the secure sharing of encrypted data with the insurer, allowing the data owner to control who sees the data and why. Such protection encourages voluntary participation by vehicle owners, helping fuel the growth of UBI. 

Data Transparency and Portability: You CAN Take It with You

Data transparency and portability go hand-in-hand with data ownership. As a consent-based data sharing service, the clearinghouse offers complete transparency to the data owner. The vehicle owner knows what data is being requested and has the option of permitting or denying access. The clearinghouse allows the data owner to share his data and driving safety score with multiple insurers.

Data Clearinghouse or Data Exchange: What’s the Difference?

Aggregated driving data services are taking different forms. While all share the purpose of providing a “one-stop” storehouse of driving and vehicle data, they do not all operate in the same manner or provide the same services.

The primary distinction can be explained as an open marketplace vs. a closed system.

As an open market, a clearinghouse merely facilitates the transfer of data from vehicle owner or TSP to insurer. The insurer then underwrites a policy based on this data (and other factors the insurer deems important) and determines a policy premium. In this open system, there are no regulatory filings required; data is used in the insurer’s existing underwriting process, and the insurer retains complete control over pricing, applying credits as warranted. Furthermore, the marketplace determines the value of the data: How much is an insurer willing to pay for detailed trip histories, for example?

In contrast, an exchange uses driving and vehicle data to compute a rating and pricing recommendation for the insurer. Because the exchange is determining price, this rating system must be filed with state regulators. In this closed system, the exchange assumes the role of underwriter and pricing specialist, leaving the insurer with little room for proprietary pricing, segmentation or differentiation. The exchange controls the data and the insurance product.

Data-Driven, UBI: A Return to Profitable Auto Underwriting

UBI offers auto insurance carriers an unprecedented view of vehicle use and driving behavior. Insurers that embrace UBI and develop a data-driven underwriting and ratings process will benefit from more consistent underwriting, improved segmentation and better selection. Those that do not will likely suffer from adverse selection and an underperforming book of business.

The key to successful UBI adoption will be access to, normalization of and correct interpretation of all this data. Undoubtedly, auto insurance carriers will be hearing more about the clearinghouse concept and the pivotal role it plays in UBI.