Depending on which report you read, somewhere between 3 million and 5 million drivers are now taking advantage of telematics-fueled usage-based insurance (UBI) programs worldwide. Aite Group believes that the larger figure includes commercial lines, so on a global scale the UBI market has remained relatively small and undeveloped. Aite Group estimates that by the end of this year, 75 P&C carriers (out of a universe of 3,500) will have launched UBI pilots in the United States.
This relatively unimpressive number is about to change, however, as advancements in telematics technologies, along with an approximate 80 percent drop in hardware costs, ratchet up the industry’s interest in UBI. Consider that automakers will have added 1 billion new cars on roads around the world by 2023, about 150 million of them in the United States alone. These cars will be outfitted with a variety of standard telematics technologies, creating a consumer expectation and an opportunity for insurers that want to get in the UBI game. The vendor community is anxious to be included in the playbook, too. Aite Group estimates that more than 250 vendors are champing at the bit for their share of the UBI market.
Even the traditional private passenger auto insurance model, in which “safe” drivers end up subsidizing “riskier” drivers, is being challenged with the promise of improved underwriting via the use of additional risk classifications and rating based on actual driving behavior (versus proxies).
Yet with all the hype surrounding UBI, some P&C insurers are scratching their heads, wondering what all the fuss is about. At a recent panel discussion held as part of the Insurance Telematics USA 2013 conference, an insurer responded to a question concerning UBI ROI, stating “I’ll believe it when I see it.” This comment is not surprising in light of the industry’s risk-averse culture; after all, the hallmark of the industry’s financial accomplishments has been its successful “risk in moderation” approach.
True, there are not a lot of hard numbers to report related to Tier-1 or Tier-2 carriers’ ROI. Not yet, anyway. Based on ongoing research, we can report impressive soft metrics, such as customer satisfaction, stickiness, brand recognition, establishment of trust, and the opportunity to engage online with the customer continually and on the customer’s terms.
Insurers on the fence about whether to include UBI in their personal lines auto products should also consider what their customers want. Overall consumer awareness and acceptance of pay-as-you-drive insurance is growing. Previous Aite Group research holds that 56 percent of North American consumers surveyed would be interested in saving costs via discounts based on allowing carriers to monitor their driving.
Can those auto insurers who choose to wait for solid ROI figures afford to put caution ahead of a forward-thinking UBI strategy? As these cautionary insurers take time to consider their UBI value proposition and its predicted ROI, their early adopter competitors offering UBI will attract the better drivers, leaving behind a weak-looking risk pool, along with the dregs of mispriced or under-priced risks.
This blog has been reprinted with permission from Aite Group.
Pat Speer is an analyst in Aite Group’s insurance practice.
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