Challenges yet to be resolved for UBI

UBI was originally hailed by insurance marketing specialists in the United Kingdom, continental Europe and the United States from 2006 to 2008 as inevitable to take up to 30% of market share within a decade. So why is this innovation still experiencing only single-digit saturation?

A possible factor was that, until three years ago, the only options available to insurance companies have been black boxes installed in the consumer’s car, an addition that was considered bulky and obtrusive. New versions, however, rely on data carried in most consumers’ pockets: the smartphone.  Yet, the smart phone is not designed to stay in car it is in the user’s pockets and that could create an imagined stumbling block in customers’ minds.

Another key apprehension expressed by consumers is over privacy. Aldo Monteforte is CEO and founder of The Floow and is well aware of consumer privacy concerns. “It’s very much a function of the unrealised wide range of expectations that were produced about UBI a decade ago when consumers began looking at the option with interest,” he said. “When you look at where it is in available, such as in the UK and US, some acceptance rates are still in the single digits.”

The pricing scheme for UBI deviates greatly from that of traditional auto insurance, which relies on actuarial studies of aggregated historical data to produce rating factors that include driving record, credit record, personal demographics, vehicle type, previous claims, liability limits and deductibles.

Monteforte explained that the telematics side of auto insurance is that the driver’s behaviour is monitored directly while the person drives. Telematics devices measure a number of driver behaviours: miles driven, where the vehicle is driven, acceleration rates and hard braking. Monteforte pointed to one of his major clients in the US. “Liberty Mutual offers UBI telematics in several states in the US,” Monteforte said. “Other states hold the potential to use telematics.”

Even the American Automobile Association (AAA) division in the heart of the US automobile manufacturing country, Michigan, has not experienced the growth anticipated in its UBI programme. Luis Sanchez, a Millennial who works at Ford, echoed the privacy concerns. “I wouldn’t let my insurance company have access to my smartphone,” Sanchez said. “They already offered something similar but not as invasive: a dongle that plugs into the OBD2 port in the car. It keeps track of w fast you go, how fast you accelerate, how fast you stop, and so son. But it has no GPS module in it to tell them where you are, supposedly. I won’t even let them put that on my car. I certainly won’t be loading a phone app. Who knows what else they will be rooting around in my phone looking for.”

Another concern with US consumers is that many commute long distances and who, at present, do not qualify for improved UBI premiums. As American real estate rates continue to increase, workers are increasingly moving to the suburbs or even remote “exurbs.” Andrew Bateman, an Atlanta-based government worker who commutes 70 miles to his job and also routinely drives extensively to visit a family member, is among such unlikely consumers. While he does not have concerns about the privacy issues in the programme, his commute would probably disqualify him. “I would submit to such the UBI programme,” Bateman said. “Granted, they would get a lot of data as much as I drive, which is a lot.”

Monteforte is particularly optimistic that Millennial-age consumers will be interested in insurance pricing by telematics, owing to their greater likelihoods of car-sharing and ownership of smartphones.

“By definition, Millennials are more likely to own the smartphone; younger demographics tend to embrace the technology,” Monteforte explained. “Smartphones have penetrated entire markets.  We don’t expect a big bang explosion it will be as gradual. There is still work to be done to create sufficient awareness for UBI but it is better than five to ten years ago. Millennials tend to be young drivers without much history, and they can save between 5% and 30% with UBI.”

Monteforte notes that the smartphone programmes are sensitive to travel in subways and airplanes, thus not mistakenly adding to the user’s mileage totals. The application also has simple capability for the user to note that a trip was taken as a passenger rather than driver.

Despite the impressive growth potential with Millennials, there remain weaknesses to be addressed. For example, the needs of the increasing number of telecommuters, whose monthly driving distances may be drastically low, are not directly addressed by UBI. Still, Monteforte remains highly optimistic.

“It is quite believable that 25% to 30% of insurance consumers will be on the UBI programme within next five to ten years.”