Low-income Drivers and Smartphone Telematics Add Up to Growth Opportunity

Drivers in Texas with poor credit scores pay an extra $2,000 per year for auto insurance, according to Contributor Mitchell Schnurman at the Dallas Morning News. “Not because they’re unsafe drivers or have a few speeding tickets or even a DWI conviction,” Schnurman said. On the contrary, even drivers with a great track record routinely end up paying thousands more than higher-income drivers, thanks to their credit score.

For insurers offering usage based insurance, these drivers are an overlooked opportunity.

How many drivers are in this situation? The Dallas Morning News reports that almost two-thirds of Texans have a credit score below 700. Taking a broader look, CreditCards.com reports that the average FICO score was 692 as of April 2014, up from 690 in October 2013 and 689 in October 2012. Credit scores typically rise with age. For Millennials, age 19 to 29, the average score was 628, and for Gen-Xers, age 30 to 46, the average score was 653.

There’s a basic inequity built into credit score-based underwriting.

Insurers in nearly all states continue to rely on credit scores as a predictor of future claims – often weighting financial scores more heavily than a customer’s driving record. It disproportionately penalizes low-income and younger drivers, who are the ones most likely to sport a weak score. Furthermore, it penalizes them illogically. Just because a customer doesn’t bring home a lot of bacon doesn’t mean they’re a bad driver.

Smartphone telematics presents a better way.

The insurance industry has traditionally relied on proxy factors to set rates – and in the aggregate, that approach makes sense. Age, gender, car make, level of education and the like can be analyzed to predict future claims when actual causal data is not available.

In the past, causal data was inaccessible. That’s changed since the advent of smartphone telematics. Today, it’s possible to collect data and set rates on real driver behavior.

This data makes better, fairer rates a reality for all drivers. But for low-income drivers, it makes a marked difference. Imagine what an extra two grand per year might mean for a family that’s living month-to-month. For other families who’ve been driving uninsured because they couldn’t afford coverage, smartphone telematics makes insurance attainable for the first time.

It makes a difference for insurers, too.

The Insurance Research Council estimated that in 2012, there were 29.7 million uninsured drivers, or 12 percent of the market. Insurers who tap into this previously-untapped audience gain a competitive edge on a highly-competitive playing field. No need to entice these drivers away from another carrier – simply offer them attainable coverage for the first time, and you stand to grow.

It’s a win-win. Insurers can capture a previously-underserved demographic by making insurance accessible to those who’ve never been able to afford it. To learn more about this sector, and how to grow by appealing to other high-potential markets, download our white paper now.