Do insurance companies really have enough driving data to justify pricing and risk rating for usage-based insurance? Or are they guesstimating? In the second of a two-part series, Susan Kuchinskas investigates.
The profit question
One of the big, unanswered questions about usage-based insurance is whether insurance carriers will ultimately be more profitable than – or even as profitable as – providers of traditional motor vehicle insurance.
In the short term, "It's an accepted thing that putting in a UBI program for starters is a cost,” says Pete Frey, personal lines UBI program and product manager, American Family Insurance. “It is about a longer-term strategy. Ideally, companies hope to achieve more growth."
Among those costs that must be taken into account are the cost of telematics hardware – if an insurer is going the route of using its own devices – and the cost of the back-end infrastructure. Adding UBI on top of an already-existing infrastructure, as major insurers must do, is extremely costly, according to Thomas Hallauer, research and marketing director for telematics consultancy Ptolemus Consulting Group. In this respect, UBI upstarts relying on scalable Cloud solutions have an advantage, Hallauer adds.
Still, the hope is UBI will ultimately pay off.
Enabling more sophisticated pricing is one benefit. "You want to make sure you have the right rates for the right drivers,” Frey says. “One of the biggest goals is trying to create fair rates eventually."
And insurance discounts are only part of the equation, Hallauer adds. “The pricing decision is not a discount decision; it's how do you change the offering to make it enticing?" he says.
According to Hallauer, discount-based UBI incentives will eventually evolve into a more service-oriented approach that may range from life-saving services, such as calling an ambulance after a crash, to more prosaic ones, such as allowing drivers to get a driving score.
Ultimately, he says, UBI can make the customer feel comfortable in having a stronger link with the insurer.
Value beyond discounts
Frey says American Family Insurance is looking in this direction. While it hasn't pinpointed what services it might offer, it's considering safety services, making drivers aware of their driving habits and stolen vehicle recovery.
Octo’s Nino Tarantino notes that the value-added services approach is more common in Europe, where some insurance companies offer personal safety and security services, instead of discounts.
The environment is different in North America, he says, because of Progressive. The early mover's decision to base its UBI offering on a good-driver discount established the tone for consumer expectations and, therefore, shaped the market.
According to David Pratt, Progressive's general manager of usage-based insurance, Progressive tries to set its prices so the profit margin is the same for people who sign up for Snapshot, its UBI product, as it is for people who opt for traditional insurance.
Progressive's theory is that UBI customers will stay with the company longer – and so far, that's been the case. Therefore, the lifetime revenue per customer should be higher, even though the margin is the same as for traditional insurance customers.
Progressive may also save some money through helping people drive better. The company noticed that the driving of UBI customers improved when, a couple of years ago, it added the option of turning on audio feedback in the device so that, for example, it beeps when someone brakes hard.
"We see this training effect within the first few weeks people have the device plugged in,” Pratt says. “They learn to avoid hard braking, and we have evidence it helps people avoid accidents. That could be a big change in the industry, trying to actually reduce your risk."
But the big win is likely in the life of the customer relationship. Pratt adds. “We are not trying to make ourselves more profitable with this. We are trying to attract and keep good customers for a long time."
In fact, Tarantino thinks that most usage-based insurance programs cannot succeed if they're based only on discounts because of all the additional costs associated with them. He says Octo's experience with 2.4 million insured drivers in Europe shows that "when the benefits of pricing and determining risk are combined with the benefits of the understanding the moment of loss for the insurance company – when there is a crash, that is – it will be successful."
There is never enough data
So is there any such thing as enough data?
Pratt doesn't think so. Progressive’s Snapshot considers mileage, time of day and hard braking. The company recently began a pilot using GPS-enabled devices to examine whether highway versus city street driving can contribute to predicting future losses.
Progressive has found that the measurement of how someone drives is indeed a better predictor of risk than driving record, age, gender or any of the traditional rating factors. Still, "the models can still get a lot better," Pratt says.
Say, for example, Progressive wants to find out if people who are low-mileage drivers are safer drivers. The company can segment out those drivers from its customer base and see which ultimately did have accidents and which isn't. It could go further and segment the low-mileage drivers by age to determine whether low mileage is a good predictor for all age groups.
Even with 10 billion miles driven, there may not always be enough drivers in the database to provide a meaningful segment to test a theory, Pratt says.
(For the first part of the series, see UBI pricing: Reality or fantasy? Part I.)
Susan Kuchinskas is a regular contributor to Telematics Update.
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Pricing Becomes a Commodity: Insurers Enhance the Consumer UBI Proposition by Integrating Complimentary Services for Product Differentiation