Telematics and the business case for UBI

Telematics and the business case for UBI

Although usage-based insurance (UBI) is not yet widely available—or even widely known among consumers—it is currently being widely researched and tested by insurance carriers. UBI comes with real costs, and the technology and business models are still developing, so early adopters need to focus their investments. “First, evaluate who your target customer is and whether UBI customers match that target,” says Jon Inquimboy, associate product manager for Esurance, an online insurance company.

John Canali, an analyst with Strategy Analytics, notes that a key disconnect persists around UBI. “Insurers, OEMs, and wireless carriers are not aligned,” he says. But waiting until all the kinks have been smoothed out may mean missing opportunities. So, when developing UBI business plans, balance urgency with strategy.

Benefits and startup costs

Gathering and managing the data that make UBI possible is also what makes it so costly, particularly at the start. Whether created and managed in-house or via a partner, the in-vehicle devices UBI requires are expensive, and it may be a while before increased demand drives down component prices.

A second cost consideration is how to analyze incoming data. Although analysis is already part of an insurance company’s protocol, UBI may generate data at an unprecedented level. Translating all that data into usable information will take added effort.

However, the biggest benefit a UBI program offers insurance carriers is the “opportunity to create a customer experience with auto insurance,” says Inquimboy. Right now, auto insurance is merely transactional.

“Insurance is basically a product nobody really wants,” adds Canali. “You’re paying for a product you don’t use, or you’ve been in an accident and are unhappy about that.”However, UBI opens the channels for feedback and gives carriers an opportunity to interact more frequently with customers as well as perhaps to improve their driving behaviors.

The other big benefit is more effective pricing. UBI gives drivers more control over their premiums and allows the insurer to create more pricing segmentation and better accuracy, by using the customer’s actual driving behavior as the basis for rates rather than proxies like driving record and number of tickets and accidents.

Canali points out, though, that “the insurance industry has been profitable because pricing is adjusted to the driver,” and the information companies are currently able to gather is working pretty well.

Finding the right fit for UBI

UBI could also benefit mobile phone carriers interested in expanding into machine-to-machine (M2M) communications, notes Canali. He anticipates that consumer data plans will eventually be shared across devices, perhaps including cars, where UBI apps could feed information back to the insurer. (For more on M2M, see Special report: Telematics and machine-to-machine communications; for more on data plans, see Telematics and the search for a universal data plan, Telematics and the value of data and Telematics and probe data: The revenue opportunities.)

Despite these benefits, UBI is not a sure-fire win, nor is it likely a good fit for all auto insurers. “There are definitely some risks,” says Inquimboy. Insurance carriers looking to write policies for “preferred business” may find UBI a compelling model, as it can help with customer retention. However, if a company is focused on the “high turnover” part of the market, UBI is “not the wisest initiative because it’s a capital-intensive program,” he says.

With those points in mind, Inquimboy reasons that companies interested in UBI shouldn’t wait too long to get a program started. Otherwise, they may experience “adverse selection” and be left mostly with customers who don’t suit their pricing model.

Canali adds that once a company has decided to venture into UBI, it needs to research carefully and be sure it chooses the right partners to help deliver and enable the service. “I don’t believe many insurers understand enough about automotive” to manage UBI data effectively on their own, he says.

Working together

The best way to enhance the future of UBI is for OEMs, wireless carriers, and insurers to work together, suggests Canali. But with differing agendas and concerns among these businesses, this is could be easier said than done. He cites Verizon’s recent acquisition of Hughes Telematics as something to watch as a gauge of the industry’s comfort with such combinations.

“OEMs and [wireless] carriers need to sort out their relationships before they aggressively court insurers,” he says. But once they do, they could be well positioned to offer their own insurance. In addition, as OEMs and insurers begin to collaborate on UBI, Canali wonders whether OEMs risk alienating consumers by working with specific insurance companies.

Despite the challenges, Esurance’s Inquimboy believes UBI has the potential to become an industry standard and a “permanent fixture as an option” among insurance models. Esurance is currently running a UBI pilot program in Arizona, and “so far it presents a very compelling case,” he reports. “If we decide to move forward, we can roll it out very aggressively.”

If that happens, it will be because Esurance has determined UBI to be a good fit for its corporate goals. “We’re insurance for the modern world,” Inquimboy says. “Our customers are the ones who will take to a program like this. They’re tech-savvy and self-directed.”

Jessica Royer Ockenis a regular contributor to TU.

For more on insurance telematics, see Special report: Insurance telematics.

For more all the latest trends in insurance telematics, check out Insurance Telematics USA 2012 on September 5-6 in Chicago and Telematics Munich 2012 on October 29-30.

For exclusive insurance telematics business analysis and insight, read TU’s Smart Vehicle Technology: The Future of Insurance Telematics report.

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