In much the same way that Cassandra warned the Trojans a big change was coming, people have been predicting the end of the annual renewable car insurance policy for many years. Change advocates believe it’s only a matter of time before telematics and usage-based insurance (UBI) will enable risk pricing to be done in real-time, thereby consigning traditional car insurance to the history books. In the 21st century, the moral of Cassandra’s story is less about the accuracy of a prediction and more about inspiring people to deal with the hard truth that predictions foreshadow.
However, until the global coronavirus pandemic, UBI simply was "a dog that does not hunt." While a few countries have higher rates of adoption, overall adoption in the U.S. and Western Europe is still below five percent. Only in Italy, where UBI/telematics has an 18 percent rate of adoption, can it be said to be mainstream – and legislation has been the driving force there. In most of the rest of the world, it is either a specialist product for young drivers, or an effective customer acquisition tool which only represents the tip of the iceberg when it comes to utilizing – and benefiting from – telematics data.
Focusing directly on the customer; A small commercial lines shift
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Of course, the destruction of Troy was a single event from which the Trojans basically had no path to recovery. Fortunately, changes to car insurance and the adoption of telematics technologies which enable UBI have been more incremental. Telematics first appeared in the early 2000s to widespread fanfare but capturing only three to five percent market share in 20 years is nothing to shout about. As 2020 came to a close, it seemed possible that the pandemic has positioned telematics and UBI at the cusp of a big leap forward. Why?
At a macro level, in the space of several months, the COVID-19 pandemic has created a concertina effect and brought forward change (and the investment/destruction that accompanies change) across many industries, including insurance, by a factor of years. That includes UBI. Suddenly, lots of UBI propositions are coming to the market, propelled by growing public acceptance of personal data sharing, changes in mobility and car ownership, and a demand for insurance products that can flex to social and economic uncertainty. What would have taken decades to achieve has now happened in less than a year.
The first wave of UBI – including initiatives like Progressive’s Snapshot – was about risk selection, where insurers gained a selection benefit and more accurate pricing based on actual risk as opposed to historical proxies, such as claims history. It was a dramatic a-ha moment for underwriters to experience real-time pricing and risk selection via telemetry after decades of backwards-facing analysis followed by fingers crossed for a collision-free year after signing off on a quote. Today, the current COVID-generated wave finds customers adopting “perpetual-type” programs, where the policyholder consents for driving data to be analyzed continuously, facilitated by lower-cost or tethered apps where the smartphone acts as the sensor. The concertina effect of the pandemic is pushing this second wave of UBI through to the mainstream much more quickly than the first wave.
It appears that as 2021 dawns, insurers are also knocking on the door of UBI “3.0,” where the focus will shift to achieving a true return on investment (ROI) from investments in telematics technology. The key to ROI from UBI 3.0 will be both upstream – through customer engagement and “nudges” towards safer driving, and downstream – through faster claims resolution.
After all, telematics is fundamentally about crashing, not driving. The true origins of telematics are in the black box flight recorder now a part of every modern aircraft and critical in the investigation and resolution of every crash. Putting a piece of hardware in every insured car to provide automated first notice of loss (FNOL) alerts and forensic levels of crash detail would mean that liability and damage repair decisions could be made much more quickly – and fairly.
In claims, time is money, so speedy resolution equals huge cost benefits. Auto claims cost U.S. and European insurers approximately $360 billion annually. The smart application of telematics data could substantially reduce this figure, potentially delivering double-digit combined operating ratio improvement for its capacity providers through the use of data in claims alone.
The appeal of telematics to insurers lies in its potential to further improve loss ratios through active engagement with policyholders. Insurers today rarely communicate with customers, except at renewal or in the case of an accident or claim, neither of which are positive experiences. Insurers can incentivize changes in driving behavior through frequent touchpoints and create opportunities based on how often customers look at driving scores.
For sure, telematics-based UBI programs require upfront investment, but auto insurers, in particular, cannot afford to dismiss the potentially game-changing ROI that telematics and UBI can offer. Improving loss ratios, claims efficiency gains, and less customer churn will be the reward, worth hundreds of millions of dollars.
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