Big challenges but bigger opportunities for UBI

Usage-based insurance (UBI) is considered by many to be the future of vehicle insurance. After all, we live in a world where connected cars are becoming more and more prevalent on the roads. Also the rise of alternative transport choices such as ride-sharing services means that many of us are not as dependent on our personal cars as we once were. The classic, one-size-fits-most auto insurance model might not be on the road much longer.

It’s not going quickly, however. According to researcher IHS Markit, UBI covered less than 2% of vehicles in operation at the end of 2015 in the US. Meanwhile, Europe’s number one UBI market, Italy, had a rate of 10%; higher but not exactly lofty. There are numerous reasons for the modest figures; here are three significant ones. First, because they’re so reliant on the vehicle’s real-time data (as opposed to the history of the car and the driver), UBI solutions have traditionally been pricey and resource-intensive for the provider. Also, the data these solutions collect is limited to the set provided through the port.

Second, although UBI isn’t a brand new form of insurance, it’s relatively young to the market. Not surprisingly, it’s favoured by youthful drivers – according to Nielsen, Millennials ‘are 44% more likely than the average consumer to use a device from their insurance company to track driving behavior in exchange for discounts’.

Third, UBI isn’t as ubiquitous as the traditional forms of auto insurance. Even an active policy writer like America’s Progressive doesn’t yet offer UBI in every state; potential customers in Alaska, Hawaii, Indiana, North Carolina and, crucially, car-loving California are out of luck.

So for now, UBI must still be considered a niche product. So how can insurers, working with carmakers and telematics solutions providers, position it as a mass-market offering that becomes the standard, or at least a leading option, for vehicle owners?

The inevitable march of technology will help take care of the first problem. The scope and sophistication of telematics are increasing sharply, to the point where every important scrap of data about the functioning of the car is becoming available for dissemination. What will matter here is the link between insurer and telematics solution provider – getting as much access that data stream as possible for the former.

Smartphones are also helping to bring down the costs of providing UBI. Mobiles not only allow policy holders to access the services insurers provide them, they can also function as data collection points. From them, the insurer can ascertain information such on driving behaviour that isn’t necessarily available in even the most advanced telematics solutions. On top of that the policy holder funds the cost of the technology, as the owner of the device. Collecting this information raises privacy and data-protection worries. Insurers must effectively address these concerns, while making a strong case that they can be entrusted with that information.

As with technology, simple demographic shifts will assist in resolving the second issue. It’s the young who generally use, and are more comfortable with, cutting-edge solutions. That, plus growing familiarity with UBI offerings, is sure to increase penetration among drivers.

Regardless, as with any product, UBI policies need to be sold. Also, more providers will leap into the market, and competition is going to intensify. So insurers should have a cold, hard think about how to grab and retain customers. Loyalty/rewards programmes akin to credit card issuer inducements are a compelling direction to go.

Meanwhile, some in the UBI speak of the need to ‘game-ify’ their offerings. An example of this would be monitoring functionality that tracks a user’s driving habits, and encourages him or her to improve them. Further along that road, ‘car/driver diagnostics’ via a smartphone can offer helpful tips on getting better performance out of a vehicle, or modify driver behaviours for the better.

As for the third challenge, ubiquity, that depends to a high degree on the factors above. There must be enough demand for a product for it to be offered in a state, region or country. Auto insurance traditionally has been a rather plain-vanilla offering, with choice limited to a select few tiers of coverage. UBI has much greater flexibility but at the same time it can be significantly more complex. Providers will need to find a way not only to present it as a compelling alternative to traditional insurance but also to help customers tailor the coverage that they require.

UBI can drive down costs for a policy holder and it can save many lives by encouraging people to drive more carefully. These are strong selling points; insurers should not be at all shy to emphasise them in their marketing efforts.

UBI is already a hit with a certain segment of the driving public. That segment can easily grow into a massive, worldwide market but this won’t happen on its own. Insurers will have to put foot to pedal and work to ensure that the market accelerates forward. A bright future awaits, both for them and the driving public.

[Ins.Volkman.2016.11.10]

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