Usage-Based Auto Insurance, Slow at First, Picking Up Speed

May 12, 2016

Usage-based auto insurance will explode globally in the next seven years, a new industry analysis asserts.

IHS Inc.’s IHS Automotive predicts that 142 million customers will sign up globally for the telematics-infused policies by 2023, up from nearly 12 million in 2015.

Usage-based auto insurance relies on a telematics system inside the vehicle that captures real-time information about how a driver fares and the road and the risks encountered along the way. Underscoring its popularity among younger drivers, 88 percent of millennials said in a Towers Watson survey last fall that they were interested in taking out a usage-based auto insurance policy, versus 74 percent among all other age groups.

Insurers including Allstate and Progressive have been offering usage-based auto insurance coverage since the technology initially debuted about a decade ago.

IHS Automotive said that use of the technology has grown slowly, due in part to “market stagnation and the reluctance of insurers to embrace the solution.” But that’s changing, according to the report, because of wide expansion as new insurers join the competition.

IHS Automotive, an auto industry consultancy, compiled its IHS Usage Based Insurance Report based on more than 40 interviews with insurance carriers, data aggregators, telecommunications companies and automotive original equipment manufacturers.

The study said that as insurers explore the best and strongest telematics business models, the U.S. – as the largest auto insurance market in the world – will lead the pack in terms of marketing and innovation. There are currently 5 million usage-based insurance policies in force in the U.S.

But IHS Automotive said it expects big growth in other markets too, including China, Italy (where usage based auto insurance already has a double-digit share), and the United Kingdom.

The number of live telematics-based motor insurance policies, including black box policies, in the UK increased by 40 percent by January 2016 over a year earlier, according to research by the British Insurance Brokers’ Association (BIBA).

A recent report by Fitch noted that usage-based technology, along with driverless car technology, promises to transform the auto insurance industry. In the short-term, telematics may have the bigger impact, especially for insurers that are early adopters.

“Early movers in telematics could be at an advantage among insurers as it enables them to much more accurately price the risk of a driver than traditional pricing factors such as age, postcode and type of car,” the Fitch report said. “Evidence suggests that the lower premiums on these policies are more than offset by cost savings due to better risk selection and better driving behavior by policyholders with telematics.”

Progressive Insurance, a pioneer in the use of telematics, believes its work with telematics will help it adapt to the newer world of driverless cars. According to Progressive CEO Glenn Renwick, as cars become more automated, the technology could be used by underwriters to design policies. Auto insurance will have “more to do with information that comes from the car than the classical segmentation with regard to characteristics of the driver,” Renwick has said.

One of the reasons usage-based policies are gaining popularity is that telematics devices appear to change the behavior of drivers. More than half (56 percent) of the 1,135 drivers participating in an Insurance Research Council (IRC) public opinion survey said they have made changes in how they drive since installing a telematics device provided by their insurance company in their primary vehicle.

Improved driving is important because monitoring a car with a device is not cheap and is only worthwhile if it lowers claim costs. The device, known as a dongle, can cost $100. Plus there are costs for wireless communications, as well as consumer, employee and agent education. For an insurer to “break even,” the savings from better driving must offset the costs of technology and any telematics-based discounts. By one ISO actuary’s account, the loss ratios have to drop from 13 to 22 percent to justify a permanently installed device.

Some consumers have been reluctant to sign on out of privacy concerns; however consumers’ comfort level with sharing personal UBI driving data is increasing, according to LexisNexis.

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