If you’re a safe driver – and let’s just assume you are – you shouldn’t have to pay as big a premium for auto insurance as should someone who drives on the sidewalks. Right?
That’s the logic behind usage based insurance or pay as you drive insurance.
The innovation started about a decade ago and has evolved considerably. In fact, many experts predicting that up to 20 percent of all vehicle insurance in the U.S. will incorporate some form of UBI within five years. (source).
What do your customers think about usage based insurance?
The concept of usage based insurance has been generally well received, especially among younger drivers (age 30 and under).
The concept has a basic sense of fairness about it. For a customer, it’s satisfying to know their bill is derived from their own behavior – not from what some massive pool of aggregated data is hypothesizing about a theoretical version of them.
For customers who consider themselves excellent drivers (which is most of us, by the way), there’s the allure of cost-savings too. It’s appealing for drivers to think they can lower their bill by driving less often and being more diligent about observing the rules of the road.
There’s a side-benefit to that. Pay as you drive insurance provides a welcome incentive, for those who think big-picture, to behave in ways that lighten their ecological footprint, and make the roads safer at the same time.
Here are a few interesting statistics, while we’re at it:
• Almost two-thirds of customers surveyed in one study (ages 21-29) said they were willing to give pay as you drive a try.
• In another study, over 35% of respondents viewed usage as the most important factor in setting their insurance premium – while only 19.7% thought their driving history should be the main determinant.
• When provided a guarantee that their current premiums would not increase, one survey found that almost 90% of participants were interesting in switching to a usage-based policy.
Technology moves fast in the insurance industry, and a company’s ability to attract and retain customers depends on staying ahead of the curve. Interested in usage based insurance? Your customers are.
Being on the leading edge of technology usually doesn’t come cheap. Whether you’re introducing an electric vehicle, a driverless car or usage based insurance program, there’s a tremendous amount of research, development and testing involved. For this reason, smaller players are often spectators, letting the big guys lay the groundwork. And, that’s exactly what has happened with usage based insurance.
The big guys have spent the past few years testing the pay as you drive insurance waters. Who are the usage based insurance pioneers? They include:
State Farm Drive Safe and Save
Unfortunately, the return on investment for most of these first-generation pay as you drive programs has been missing in action. In fact, a May 19, 2014 article in the Insurance Journal states, “For the insurer to ‘break even’ the savings from better driving must offset the costs of technology and any telematics-based discounts.” In one example with an OBD dongle-based program, loss ratios would have to drop 22 percent to justify a permanently installed dongle that lasts about three years.
While that percentage is high enough to keep a small or regional carrier out of the usage based insurance territory for a long while, it doesn’t tell the whole story – it only tells the story of the usage based auto industry pioneers. And now that those pioneers have forged the pay-as-you-drive insurance trail, the journey has been much easier for anyone who cares to follow.
With that short history in mind, here are three new developments to make you reconsider usage based insurance:
Cost: One of the biggest costs encountered by the UBI pioneers is the hardware expense. When you eliminate the hardware, ROI gets a lot more manageable. There is literally no inventory or distribution with smartphone UBI. Drivers simply download the free insurer branded app onto their smartphones.
Value: UBI is moving beyond a price focus to a method of offering policyholders comprehensive value. Again, the smartphone offers a friendly interactive customer conduit. The smartphone app can be customized by each insurer to provide coaching, facilitate roadside assistance or allow for parental monitoring of teen drivers and more. The app represents a brand much better than a little black box ever could.
Data interpretation: Another major chasm between insurers and profitability has been the usability of data collected. Many insurers have difficulty accumulating enough data mass to make actuarially-sound decisions about underwriting and pricing. Fortunately Driveway already has more than 170,000 drivers with apps installed, and with that mass, we’ve developed a proprietary scoring algorithm so that driving behavior is instantaneously scored for both the driver and the insurer if desired. Furthermore, data collected by the app is in many ways more accurate than that collected by OBD devices.