The autonomous driving revolution; COVID-Driven Shifts in Commuter Patterns; growing awareness of the environmental impact of the automotive industry – all these factors are driving new behaviors both in the automotive industry and among the drivers themselves.
Of course, the car insurance company had to switch over.
The motor insurance industry must now strike a delicate balance between meeting customers’ changing expectations and keeping up with a new generation of digitally savvy drivers.
To address these ever-evolving issues, existing technology and pricing models must be leveraged and modified to take into account the long-term future of auto insurance.
The necessity of the UBI
A rapidly growing approach to auto insurance is usage-based insurance, a policy that allows insurers to personalize engagement solutions and expand a customer base.
In traditional insurance structures, policy profiles are based on how much risk the policyholder is taking on.
UBI differs from fixed rating frameworks in key ways: UBI premium calculations also take risk into account, but they synthesize risk levels with the number of kilometers driven by a user. Drivers who drive less are automatically charged a lower premium than they would otherwise have, as statistically they are less likely to get into an accident and claim a claim. This allows insurers to accurately charge drivers who spend an above-average amount of time behind the wheel, while sparing those who drive less from paying extra hours for idle time.
The UBI proposal has been given new life as inflation continues to drive up car insurance costs and consumers make greater efforts to find cheaper options. And as winter approaches and consumers seek to mitigate higher energy bills, UBI is already gaining popularity as a means of saving – 1 out of 5 of the cheapest car insurance quotes come from insurers that use telematics.
In the UK, UBI has successfully transformed the market for young drivers, not only by making car insurance more affordable (often more than half the standard price), but also by showing statistical evidence that the number of serious injuries resulting from accidents has fallen by more than one Third has fallen for this age group.
How does UBI work?
UBI relies on the use of telematics – built-in sensors that relay data from the road to insurers, allowing them to create policies tailored to specific cars or drivers. Similar tools have been implemented in the past to record driver behavior using a black box that was physically installed in the car.
These applications pave the way for a seamless transition to UBI plans as they no longer require the installation of special devices – which in turn reduces the cost of collecting driver data from hardware, dongles, smartphones and directly from the vehicle. The rise of such tools has coincided with the insurance industry’s recent shift towards a personalized customer experience. Using telematics as a means of offering personalized rewards based on a person’s vehicle usage, driving skill and average range is a step in the right direction.
Similar to the pandemic-driven growth in mileage-based programs, the current economic crisis is likely to push insurers to take an active role in reducing costs for consumers, which is expected to increase the use and implementation of telematics in the auto insurance value chain. Accordingly, current estimates project an expected YoY growth of 17.92% in the use of telematics, with the vast majority of insurers using telematics-based products, particularly in the USA, Great Britain and Germany.
Benefits of UBI
When implemented strategically, UBI models can reduce costs for insurers and policyholders. Insurers gain actionable data, customer self-selection, new pricing insights and improved process flows, which in turn translates into consumer benefits – from seamless claims processes to lower auto insurance costs.
Because UBI premiums are also calculated based on risk As usage rates, each policy has a compensation structure inherent in it. Insurers have always tried to reinforce positive behavior behind the wheel – rewarding safe driving with lower premiums and raising rates for reckless drivers. UBI can take this practice a step further. Safety incentives can be calculated and managed much more precisely, since safe driver tags are not only based on the number of previous damages or incidents, but also on variables such as time behind the wheel, prevailing road and weather conditions in a driver’s area, level of driver responsibility at a specific accident and other parameters based on telematics data.
Such incentives lead to fewer accidents, less damage and, above all, safer roads. That’s why we’re seeing market-wide growth in Telematics-First insurance for MGAs and brokers alike.
Finally, offering UBI plans is a powerful selling point that can help carriers attract more customers and drive both acquisition and retention. UBI plans tend to be cheaper than traditional policies, so users are more likely to opt for them, especially if they don’t use their car regularly – as is the case for many vehicle owners.
The future of UBI
Pricing pressures are an inevitable short-term by-product of basic income, which could impact certain insurers’ renewal rates as consumers seek cheaper options.
As the UBI becomes more ubiquitous and consumers become more comfortable using an application to check their score, prices and additional services, we will see a change in behavior around customer service and engagement. Imagine the power to have a consumer interact with your brand on a daily basis—and the ability to educate users, reinforce a safety and cost message, and offer additional services.
The long-term implications will be an ongoing battle between automakers. These manufacturers have recently invested billions in in-car communications and technology, but are struggling to generate profitable returns — intended subscriptions to media or connectivity services have not performed as expected. Luckily, high value services like insurance are the natural next place to take advantage of these integrations.
At Sapiens, we predict that within the next five years, 100% of new cars will be equipped with UBI-compatible connectivity, using data to enrich consumer insurance options right at the point of purchase. McKinsey Center for Future Mobility expects connected cars to account for 90% of new car sales in the US by 2025.
The global UBI market is expected to continue growing $43.31 billion in 2021 to $132.02 billion in 2026. If these trends continue, UBI could play a crucial role in the future auto industry. Auto insurers that are in it for the long haul would do well to investigate how UBI can supercharge their policy offering and must first ask themselves the following questions: Where and how do they play a role in the rise of UBI? Is this coming reality – an OEM-dominated motor insurance market – just around the corner or far away? What are they doing to prepare for this reality?