With the proliferation of telematics devices, whether aftermarket or factory installed, and mobile tracking and recording apps, the era of the connected vehicle is upon us – and with it the emergence of data-driven Usage-Based Insurance, or UBI. In this article, Chris Carver, President and Founder of ATG Risk Solutions, looks at the current and future state of the UBI market in North America.
Just consider… nearly 30% of all commercial vehicles (light, medium, heavy and extra heavy duty trucks, passenger cars and specialty vehicles) in the United States have installed telematics devices, and a greater number are connected in some way via smartphones, tablets and other portable devices. The combined data collected represents nearly 300 billion driving miles, and almost 5% of the total auto premium written in the U.S.
Insurers now are able to know, with unprecedented accuracy, where, when and how an individual vehicle is driven. They can know area and hours of operation, driving behavior, route histories, vehicle performance characteristics and much, much more. They can even re-create collision events using this data, and have volumes of real-world driving data at their fingertips to inform more precise underwriting and pricing.
With UBI growth accelerating at >55% CAGR, it is likely that by 2020 UBI will account for a minimum of $41B in earned premium, nearly 19% of all auto premium, relying on directly measured risk analytics rather than proxies to inform underwriting. As a result 1-in-5 drivers will then be rated individually rather than as part of class or group.
Getting there will be a challenge for many insurers. Here are some of the drivers, roadblocks and future considerations on the way to broader implementation of UBI:
1. Open Market Clearinghouses. To date, most UBI programs have been pilots in which an insurer uses dedicated device hardware to capture and forward driving data. The downside to closed systems is three-fold: 1) the expense to purchase and manage the hardware, 2) the limitation on the number of vehicles that can be equipped, and 3) the need for IT support for data handling, analysis and storage.
Recently announced data exchanges which use driving and vehicle data to compute a rating and pricing recommendation for the insurer, are stepping into the aggregator role. But, in doing so they are also assuming the role of underwriter and pricing specialist, leaving the insurer with little room for proprietary pricing, segmentation or differentiation.
So how will insurers access all of that valuable driving data? The answer is the independent clearinghouse – an open market system for aggregating data from many sources, verifying it and normalizing the data for use in underwriting. The clearinghouse removes the IT burden while expanding the universe of telematics-equipped vehicles. The Open system provides simpler access to larger data sets for carriers of all sizes, including those in specialty and non-standard markets, which ultimately benefits the insured and the pricing fairness.
2. Smartphones as Driving Data Collection Devices. Smartphones will benefit every UBI program, by providing basic VIN, mileage, and location information. A good starting point for more accurate auto underwriting. The application of the smartphone to UBI data collection will make driving data collection easier and more accessible for all. Experienced UBI carriers are gaining on the competition by adding this affordable discriminator.
3. Aggregated Data Provides Insight into Trends. Carriers with UBI programs benefit not only from the ability to more accurately underwrite and rate an auto policy, they are realizing advantages that aggregated data provide in uncovering risk trends (both within the insured fleet, and the larger SIC code group of similar fleets). The clearinghouse model with normalized data simplifies the challenges of trend spotting, and reduces the potential impact of adverse selection.
4. Standard, Contextualized Fleet Driving Safety Score. More than an individual driver behavior score, a fleet safety score takes into account all drivers, vehicle characteristics and safety equipment, and the driven environment – road surface, traffic dynamics, weather, road maintenance and much more. Understanding the context of the driving experience adds insight and leads to a comparison of similar fleets, operating in similar territories, and an indexed ranking of how individual fleets are doing in relation to their peers… a sound basis for underwriting decisions.
1. Too Many Data Sources. In the US, auto insurance carriers are looking at accessing driving data from more than 70 telematics service provider fleet management companies, 30 auto manufacturers and countless mobile apps developers (for smartphones, tablets and other mobile devices). The complexity, time and expense this adds to the process of acquiring the driving data is preventing many insurers from jumping into the data pool. The clearinghouse, however, solves the problem of accessing data on millions of vehicles by aggregating data from all available sources, helping UBI insurers overcome the problem of having to negotiate with dozens of data suppliers.
2. Too Many Data Formats. With so many data sources, each using different telematics devices and software, pulling data from different types of vehicles, the aggregated data is a jumble of formats, with no two data sets the same. A clearinghouse plays a critical part in scrubbing, authenticating and normalizing this data for hand-off to underwriting.
3. Lack of Data Standards and Transparency. With so many data sources, so many different devices and formats, and so many different applications, the need for standardized data is crucial. A standard safety score is a valuable underwriting tool that also provides the fleet owner with understanding into how the fleet is rated by the insurer and insight into where improvement is needed.
1. Desk-adjusting Claims. While the initial emphasis has been on underwriting, UBI is beginning to have an impact on claims, as well. In the U.S., where claims settlement costs hover around the $1 billion mark annually, innovative auto insurers are beginning to use UBI data to determine fault and more quickly settle claims. This ability to “desk adjust” claims will streamline the claims settlement process shaving cost without adding expense.
2. The Pre-Underwriting Score Will Evolve. Proactive carriers are moving to a unified scoring approach incorporating installed telematics, dongles and smartphones. With an indexed fleet score in hand, an insurer can automate the underwriting process, quickly identifying which applications require verification or more information, de-selecting those whose scores fall out of appetite, and moving the desirable applicants more quickly through the quote process – saving time and money, while also adding accuracy and consistency to the underwriting process.
3. Real Time Video and Weather Data. The emphasis on driver safety has attracted a new look at weather and road surface data, as well as video that captures what happens in the cab and on the road. Rapidly evolving video applications have tripled the amount of data available to insurers. With more data surrounding collision events, insurers can better adjust claims and develop risk assessment algorithms that assist underwriting and identify risks. But video adds significantly to the data storage and analytics load… one best handled by a neutral third party such as the clearinghouse.
4. The “On Demand” Economy Will Require Hybrid Insurance Products. The on-demand economy including car-sharing, ride-sharing and mobility-as-needed will require new kinds of insurance. Insurers who respond with “coverage-sharing” products will increase retention by building innovative products around larger, more accessible data sets, and the ability to determine which app was in effect at a given point in time.
Of course, only time will tell, but it is clear that we have come too far down the UBI road to turn back now. More and more insurers are echoing the refrain: “Show me the data”. Which route insurers choose from this point forward — Open or Closed Data System, a Standard Safety Score, Data Transparency and Portability – will determine how effectively they are able to compete in the auto insurance market in the future.
President and Founder
ATG Risk Solutions – The Connected Vehicle Analytics Company