Second bite of the UBI cherry could be tastiest for smaller Canadian insurers

Increasingly car insurance companies globally are using telematics to offer usage-based insurance (UBI). In the US eight of the ten largest insurers offer UBI solutions according to reports by Intelligent Mechatronic Systems (IMS). Countries like Italy, the UK, Japan and South Africa are also seeing a surge in the use of telematics.

UBI is the future of car insurance. The PTOLEMUS Consulting Group projects that in 2020 some 100M cars worldwide will be insured by pay-as-you-drive policies. No longer will drivers pay a standard fee based on their age, gender or car type but by a personalised amount based on the way they drive.

The connected car, on-board and mobile devices will register and transmit all that to car makers and insurance companies. And don’t think this trend will fade – in 2030 the number of cars insured this way will probably skyrocket to more than half of all the vehicles on the planet. That will translate to over Canadian $385Bn (£192Bn) in revenue on a yearly basis. “Like Uber, telematics will radically transform the business model of auto insurance, from underwriting to claims management. The days of insurers relying on purely statistical models are numbered”, managing director of PTOLEMUS Consulting Group Frederic Bruneteau writes in the report.

Some early adopters in Canada, such as Intact Financial and Desjardins General Insurance Group, have already integrated telematics in their insurance products to offer UBI. Aviva has dabbled with UBI but has held off implementing it in its products for now. These companies hold the advantage of being the early adaptors of UBI and have the knowledge and technology to influence the way pay-as-you-drive insurance policies will develop in Canada. Should their competitors follow them in the drive to UBI? And how can they, without years of telematics experience, get a competitive edge?

The pressure to adopt UBI is looming, Blair Currie says. He is the vice-president of business development at IMS. He sees adverse selection as the driver for UBI adoption in Canada. “As you get to penetration rates of 5% and more, if you don’t have UBI your best drivers will become vulnerable. At the early stages of the telematics game it is important to track other companies’ good drivers and retain your own. If you don’t have a telematics play, by definition your best customers know they’re paying more for their insurance than they should.” Your company will lose the business of these drivers as they flock to your competitors who offer discounts to get people to sign up for UBIs.

But adopting UBI is not just about offering lower competitive rates for customers. Because this reduces your company’s profit and increase volatility in the market, Nathalie Bégin explains. According to the senior consultant at the Ontario office of risk-management consultancy Willis Towers Watson UBI offers an opportunity to allow some de-commodification of insurance. “While the UBI market is not expected to be a huge threat to the market share of traditional products in the short term, it is clear from markets such as the US that insurers are writing large segments of profitable business into UBI products. Every insurer should at least inform themselves enough about UBI to make an informed strategic decision that will be right for them.” It is important to note telematics can increase customer satisfaction, as TU-Automotive pointed last year. By registering data of cars, on-board systems or mobile devices, can easily and instantly report accidents. Having information like speed, braking behaviour or location might greatly reduce the amount of time that Canadian insurance companies spent on processing claims. Instead of focusing on rate reductions this might prove an attractive alley for lower tier insurers.

Mobile solutions seem to be key to gain a 2nd mover advantage for midlevel Canadian companies. The technology for UBI has been making leaps and bounds in the past decade. Aviva Canada tested pay-as-you-drive models from 2005 to 2010 but stopped short of commercially implementing UBI. According to comments from its senior vice-president of marketing in The Globe and Mail in 2012, UBI was “not a simple thing to operationalise on a large scale”. The OBDs and processing the data proved too costly. But times have changed, the PTOLEMUS report on UBI’s market penetration underlines. ‘Now that ultra-low cost solutions are available, being smartphone apps, car-embedded or aftermarket devices, insurers have no excuse to procrastinate any more’.

Using apps on mobile devices instead of only OBD2 technology lower tier insurers can forego the R&D competitors like Desjardins and Intact had to invest in when they started out implementing UBI, Currie from IMS explains: “With OBD2 devices you got the time and cost of making them. A mobile device is much cheaper to deploy and works instantly. You just have to download an app.” Insurers exploring the development of mobile software can easily look at how it’s done by downloading Ajusto, Desjardins’ UBI app for mobile and Apple Watch.

But that doesn’t mean OBD2 devices are out the window, Currie says: “We, and companies like Desjardins, started off our UBIs with this technology.” At IMS they’re currently working with cheaper and dressed-down OBD2s, so-called “dumb dongles” that are connected to smartphones using superior Bluetooth 4.0 technology. In this way mobile becomes more dominant in the equation while retaining the direct data stream from OBD2 devices. The dream is to integrate these more and more with embedded technology in cars to paint a complete picture of the user’s driving behaviour. “The contextual input like traffic, lighting and weather conditions and speed limits are important. We once had a lady complain that our data registered fourteen harsh brakes and fast accelerations all on the same spot. What happened? She was stuck in a snow bank and was rocking her car back and forth.”

Integrating the whole of connected car technology with mobile devices or carmakers seems sensible. But smaller tier insurance companies can take advantage of using only mobile devices. According to Randy Carroll, chief strategy officer at ClientDesk, this grants customers the opportunity to “test-drive” an insurance policy. “Giving consumers and opportunity to download a mobile application before buying a telematics insurance product brings back some sense of underwriting back into the equation,” the former CEO of the Insurance Brokers Association of Ontario explains. “By doing so drivers who don’t fit the UBI mould can be eliminated before they start down a path that may not be for them.” This versatility – efficiently targeting your target audience and finding a niche – could be an amazing advantage for late movers.

Only one question remains. How can fast followers hope to process the daunting amounts of data that their customers create? Outsourcing, Carroll thinks will be best and, possibly, working together with similar lower tier insurance companies. “This would also allow insurers to pool resources and get access to aggregate data while at the same time remaining independent.”

In North America companies like Verisk and also Willis Towers Watson are offering these services. It’s an important stepping stone to competing with the big dogs in UBI, senior consultant Nathalie Bégin says: “Willis Towers Watson pools data from different companies and has developed a predictive score based on actual insured losses, so a company can get scored data for their customers without having first to develop a long history. Over time, they can develop the data and determine how best to evolve.”

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