How auto insurers can help solve the inequality crisis

by Jake Diner

We’ve all heard of the cycle of poverty – a situation in which low income families become entangled in a continuous poverty cycle because they are less able to access education and other resources. However, what you may not have thought of is how auto insurance underwriting practices may contribute to these socio-economic inequities.

Imagine this scenario

Anna is a low-income single mother who cannot afford good health insurance. Her child becomes chronically ill. The medical bills pile up, and because she has missed work to care for her child, she is unable to pay some of her bills on time. Anna’s already fragile credit score takes a serious hit. Then, when her auto insurance renews, she receives more bad news. Because her credit score is low, her insurance rates significantly increased. Now the cycle continues. While struggling to afford auto insurance, other bills slide and Anna’s credit score continues its downward spiral.

A good idea with an unintended consequence

Two decades ago, when auto insurers began using credit scores to establish insurance rates, this was surely not the scenario executives envisioned. They simply knew that for whatever reason, there was a correlation between credit scores and auto accidents. And, they knew that by leveraging credit score intelligence, they could likely drive down auto insurance loss ratios.

There’s an unintended side effect though: It’s harder (a lot harder) for lower-income people to maintain good credit as you can imagine based on our earlier scenario. Even if low income people are above-average drivers, their below-average credit scores could saddle them with heavier premiums.

Now that we know better, we can do better

While credit score intelligence improved auto insurance profitability, it’s by no means the ultimate solution. While there is some correlation between credit scores and driving behaviors, there is an absolute relationship between real driving data and a driver’s propensity for accidents.

Now that auto insurers have the means of going beyond credit score rating, they should. It’s the fairest approach, particularly for those concerned about leveling the auto insurance playing field for low income Americans.

What if insurance companies were willing to use UBI data as an alternative to traditional credit-based underwriting? What if low income Americans were able to request that their insurers use real driving data to establish their rates? There would be a real incentive to drive safely – a key benefit for everyone out on the road.

Economics and insurance: Why it matters

When you think about the socioeconomic correlation between income and car insurance, it becomes clear that lower-income people are disadvantaged. Credit-based premium rating is just one example of how people who have less to spend ironically end up paying more. As an article in St. Louis Post Dispatch reports:

“High school dropouts may pay more than people with master’s degrees – even when the well-educated have worse driving records. Janitors may pay more than business executives. People who rent may pay more than home owners. People who live in poor, crime-ridden parts of town will pay much more than others.”

Usage based insurance has the potential to help sidestep the murkiness of income inequality by setting insurance rates based on how people actually drive, rather than by their bill-paying ability.

After all, everyone deserves a shot at affordable auto insurance. And, everyone could use an incentive to drive safer. Perhaps usage based insurance can help us achieve both those goals. Click here to learn how usage based insurance works for auto insurers.

04

Dec 2014

The Auto Insurance Loyalty Puzzle: Is Usage Based Insurance the Missing Piece?

by Jake Diner

In any industry, customer loyalty is a precious commodity. That’s no less true in the world of auto insurance. As Bain & Company puts it: “Loyalty improves a carrier’s economics and leads to sustained, above-market growth.”

But what do we mean by “loyalty” exactly? What does it take to make customers stay with an auto insurer for the long-term?

Customer retention isn’t just customer satisfaction.

When a customer chooses to stick around because of the benefits an insurer provides, their actions are driven by positive experience. You could say, then, that the key to customer retention is customer satisfaction.

You’d be mistaken. A new survey released by Accenture Global found that while 86 percent of insureds who filed a claim were satisfied with how it was handled, 41 percent of those customers are still likely to switch insurers in the next 12 months.

In fact, the data shows that the very act of filing a claim makes a customer more likely to switch insurers, even when they’re completely satisfied with how it went.

It’s not to say customer satisfaction in the claims process doesn’t matter – speed and transparency being the two most important factors, according to 94 percent of Accenture survey respondents. Having access to digital channels also ranks high on the satisfaction requirements.

However, if having a claim tends to trigger the insurance shopping process, the most important question may be how to prevent the claim altogether.

Use UBI as a tool to prevent claims and build the relationship.

By harnessing usage based insurance data, insurers can define strategies to help customers manage risks and even reduce the number of claims they file. As a result, insurers not only lower claims costs, but may gain an advantage in customer loyalty, says Bain & Company.

However, usage based insurance isn’t just about data collection. In fact, it offers insurers the opportunity to go far beyond information gathering to the state of relationship nurturing. UBI provides a chance to communicate with customers every time they drive in a positive and constructive manner. It’s the ultimate digital connection – not hinging on potentially negative touch points like claims or billing, but rather facilitating quality, helpful coaching on an ongoing basis.

And here’s the great thing: The relationship nurturing capabilities start immediately. Insurers can provide helpful driving tips as soon as UBI policyholders install the app and take their first trips. Insurers don’t have to wait for data, actuaries and new rating tables. They have an instantaneous ability to provide coaching and thereby start a new kind of insurance relationship.

They say that when you teach a man to fish, you feed him for a lifetime. What happens when you teach a man, or a woman, or their teenagers to drive more safely and avoid the pain of accidents? They appreciate it and remember it. And, greater loyalty, retention and referrals just might ensue.

Click here to learn how usage based insurance works for insurers.

12

Nov 2014

Dip A Toe into the IoT with Usage Based Insurance

by Jake Diner

The Internet of Things is a rapid, widespread shift in technology that’s taking the world by storm. It’s the force that’s making a modern-day reality of the futuristic world – a world we used to only see in the movies.

Smart houses that turn on the lights and heat before you arrive home …
Shoes that tell first-responders where exactly where you’ve fallen …
Cars that parallel-park themselves …
Usage based insurance apps that can detect an odometer reading …

So what does this have to do with insurance?

If you’ve read some recent industry articles, you may believe that insurers are slow to catch on to the storm of changes brewing in the IoT. After all, when a worldwide trend is developing this fast, insurers can’t afford to get caught napping, as Insurance Networking News inferred last week. In the Nov. 5 article, author Lenny Liebmann says,

“Despite the proven value of vehicle telemetry in supporting usage-based insurance (UBI) offerings for car owners, the insurance industry is taking a wait-and-see attitude towards the broader Internet of Things (IoT). Their attitude means that it may be years before most insurers gain the ability to capture, analyze and integrate IoT into their pricing, underwriting and claims operations.”

The Insurance Networking News article was partially based on a recent report by Celent. When Celent asked a panel of insurance CIOs how C-suite management views the Internet of Things, 11 percent of small insurers and 25 percent of mid-size insurers replied that it would substantially change how they do business. None of large insurers felt the IoT would substantially change their business models. Many who were interviewed felt that it was simply too soon to tell. The report concludes that insurers are largely in a “watchful waiting mode,” with usage based insurance being one notable exception.

There’s a good reason that usage based insurance is the exception!

Starting a usage based insurance program is equivalent to dipping your toe into IoT waters. And dipping your toe is important for informed decision making. Those of us who work in insurance know that insurers aren’t napping, but they are cautious, and rightfully so – as they’re often the ones left paying for brash decisions.

Fortunately, usage based insurance isn’t an all or nothing proposition, particularly when compared to the unprecedented task of underwriting insurance for a driverless car. With usage based insurance, insurers can ease their way into program rollouts by starting slow, implementing a small self-selection discount, and keeping filings simple. If filings are based on a small self-selection discount, loss data and scoring models most likely won’t be needed to get started. Read more about our “feed the UBI elephant strategy” here.

American education reformer, Horace Mann once said: “Let us not be content to wait and see what will happen, but give us the determination to make the right things happen.” No – the insurance industry isn’t napping – it’s contemplating and strategizing. By dipping a toe, testing the waters and making informed decisions, it can make the right things happen.

We have limited UBI pilot programs available. Let us know if you’d like to be considered.