The autonomous driving revolution; COVID-stimulated commute shifts; growing awareness of the environmental impact of the automotive industry – all these factors are leading to new behavior both in the automotive industry and among drivers themselves.
Of course, the car insurance had to switch in turn.
The auto insurance industry must now strike a delicate balance between meeting changing customer expectations and keeping pace with a new generation of digitally savvy drivers.
To address these ever-evolving issues, existing technology and pricing models must be leveraged and adapted for the long-term future of auto insurance.
The need for UBI
A fast-growing approach in auto insurance is usage-based insurance, a policy that allows insurers to personalize engagement solutions and grow a customer base.
In traditional insurance structures, policy profiles are based on how much risk the policyholder poses.
UBI differs from fixed assessment frameworks in a critical way: UBI premium calculations also take risk into account, but they synthesize risk levels with the number of miles driven by a user. Drivers who drive less will automatically be charged a lower premium than they would otherwise be because they are statistically less likely to have an accident and make a claim. This allows insurers to accurately charge drivers who drive more than average, while those who drive less don’t have to pay for inactive hours.
The UBI proposal has been given new life as inflation continues to drive up auto insurance costs and consumers put more effort into finding cheaper options. And as winter approaches and consumers try to cut back on higher energy bills, UBI is already becoming increasingly popular as a means of saving. 1 out of 5 of the cheapest car insurance policies come from insurers using telematics.
In the UK, UBI has successfully transformed the young driver market, not only by making car insurance more affordable (often at over half the standard price), but also by providing statistical evidence that the number of serious injuries from collisions with more than a third have dropped for this age group.
How does UB work?
UBI relies on the use of telematics – integrated sensors that relay data from the road to insurers, enabling them to create policies tailored to specific cars or drivers. Similar tools have been implemented in the past to record driver behavior using a device called a black box that is physically installed in the car.
These applications pave the way for a seamless transition to UBI subscriptions as they no longer require special devices to be installed, which in turn reduces the cost of collecting driver data from hardware, dongles, smartphones and directly from the vehicle. The emergence of such tools coincides with the insurance industry’s recent migration to a personalized customer experience. Embracing telematics as a means of offering personalized bounties based on a person’s car usage, driving ability and average travel range is a step in the right direction.
Similar to the pandemic-driven growth of mileage-based programs, the current economic crisis is likely to prompt insurers to take an active role in lowering costs for consumers, which is expected to lead to increased usage and implementation of telematics in the car insurance value chain. Accordingly, current estimates project an expected annual growth rate of 17.92% in the use of telematics, with the vast majority of insurers in the US, UK and Germany in particular deploying telematics-based products.
Advantages of UBI
With strategic implementation, UBI models can save costs for both insurers and policyholders. Insurers gain evaluable data, customer self-selection, new pricing insights and improved process flow, which in turn results in consumer benefits – from seamless claims processes to reduced auto insurance costs.
Because UBI premiums are also calculated based on risk as utilization rates, a reward structure is intrinsic within any policy. Insurers have always tried to reinforce positive behavior behind the wheel by rewarding safe driving with lower premiums and higher rates for reckless drivers. UBI can take this practice a step further. Safety incentives can be calculated and managed much more precisely, as safe driving cues are based not only on the number of previous claims or incidents, but also on variables such as time behind the wheel, prevailing road and weather conditions in a driver’s area, degree of the responsibility of the driver in a given accident, and other parameters based on telematics data.
Such incentives lead to fewer accidents, fewer claims and, above all, safer roads. That’s why, market-wide, we’re seeing the growth of telematics-first insurance for both MGAs and brokers.
Finally, offering UBI plans is a powerful selling proposition that can help carriers acquire more customers, driving both acquisition and retention. UBI plans are generally cheaper than traditional policies, so users are more likely to opt for them, especially when they don’t use their car regularly, as is the case for many car owners.
The future of UB
Pricing pressure is an unavoidable short-term by-product of UBI, which can affect renewal rates for certain insurers as consumers look for more affordable options.
As UBI becomes more ubiquitous and consumers become more comfortable using an application to check their score, prices and additional services, we will see a shift in behavior in customer service and engagement. Imagine the power of having a consumer interact with your brand on a daily basis – and having the ability to educate users, reinforce a safety and cost message, and offer additional services.
The long-term impact will be an ongoing battle between automakers. These manufacturers have recently invested billions in in-car communications and technology, but they have struggled to generate profitable returns – the targeted media subscriptions or connectivity services have not worked as expected. Fortunately, the natural next place to use these integrations is within high-value services like insurance.
We at Sapiens predict that in the next five years, 100% of new cars will come with UBI-enabled connectivity, using data to enrich consumer insurance options right at the point of purchase. McKinsey Center for Future Mobility expects connected cars to account for 90% of new vehicle sales in the US by 2025.
The global UBI market is expected to grow $43.31 billion in 2021 to $132.02 billion in 2026. If these trends continue, UBI could play a vital role in the automotive industry of the future. Auto insurers who are in it for the long haul would do well to explore how Ubi can boost their policy offerings, and should start by asking the following questions: where and how are they playing a role in the rise of the ubi? Is this emerging reality – an OEM-dominated auto insurance market – just around the corner or somewhere far away? What are they doing to prepare for this reality?