How usage-based insurance answers growing demand for hyper-personalisation

By Early Metrics Team - 06 March 2023

Usage-based insurance policies are becoming increasingly popular in today’s market, with a growing number of insurance companies offering this type of coverage. From 2021 to 2026, it’s estimated the usage-based insurance market will grow at a CAGR of 27,7%.

Although usage-based insurance isn’t a particularly new concept – it’s been emerging for around a decade – technological advances are boosting its growth and widening its use cases. Indeed, the current evolution of usage-based insurance is focused on the integration of new technologies and the expansion of the types of data collected. In addition to monitoring driving behaviour, usage-based insurance can now incorporate information from other sources such as GPS, weather reports, and traffic data. This evolution allows insurance companies to develop more personalised policies that accurately reflect the risk level of each individual policyholder.

Global adoption is not homogeneous, with some countries such as the United States seeing a greater uptake than others. Indeed, 16% of all automotive insurance programs in the United States are usage-based. However, demand is growing today in other regions such as Europe.

What is usage-based insurance?

Usage-based insurance (UBI) is a type of insurance policy that takes into account the driving habits and behaviour of the policyholder when determining their premium. It is sometimes referred to as pay as you drive (PAYD), pay how you drive (PHYD) or telematics insurance. The difference with traditional auto insurance policies, which rely on generalised risk factors such as age, gender, and location, is that usage-based insurance uses data collected from the client’s vehicle to determine their level of risk. The insurance premiums of usage-based insurance are calculated dynamically, using data collected from the vehicles directly, from GPS data of smartphones or using telematics devices.

What are the benefits of usage-based insurance?

1- Improving customer experience

Usage-based insurance is a great tool for insurers to enhance customer experience. With better knowledge of their customer, insurance companies can categorise them more effectively and provide them with automobile insurance policies tailored to meet their needs. Indeed, to provide better customer experience, products must be personalised, which requires better understanding of said customers. Data analysis from telematics can be a useful tool to this end.

In addition, telematics systems usually lead to more interactions with drivers. Gamification can be implemented with features like rewards and point accumulation to prevent unsafe driving. By introducing gamification in the customer experience, insurers can help boost customer loyalty and engagement with them.

2 – Optimising pricing for consumers

The essence of UBI is to adapt the price of auto insurance based on the actual usage of a vehicle or how safely the user drives. For insurance providers, telematics insurance allows for more accurate risk assessment and pricing, leading to lower costs and increased profits. For policyholders, usage-based insurance provides an opportunity to reduce their insurance costs by demonstrating safe driving behaviour. The opportunity to reduce insurance costs is a key argument for policyholders when they choose their insurance. Indeed, usage-based insurance rates are often 20% to 30% cheaper than traditional insurance rates, which is a significant reduction.

3 – Reducing the number of accidents

Studies have shown that usage-based insurance has a significant impact on reducing car accidents. Indeed, telematics-based programmes reduce crash risk by about 50% for enrolled drivers. Policyholders are less likely to engage in risky driving behaviour such as speeding, aggressive driving, and distracted driving. For example, research shows that pay-as-you-drive customers decrease their daily hard-brake frequency by an average of 21% after six months. Furthermore, UBI allows insurance providers to identify high-risk drivers and provide them with personalised coaching to improve their driving behaviour. This coaching can include tips on safe driving techniques, as well as feedback on specific areas where the driver needs improvement.

As usage-based insurance becomes more widely adopted, the potential benefits for reducing car accidents are significant. In addition to reducing accidents, usage-based insurance also has the potential to reduce traffic congestion, air pollution, and overall wear and tear on vehicles. These benefits not only help policyholders save money on insurance premiums but also contribute to a safer and more sustainable society. As such, UBI is a win-win for both insurance providers and policyholders.

Usage-based insurance applied to other industries

Usage-based insurance is currently not used in other insurance sectors the same way as it is in the automotive industry. However, it might not take long until telematics-based data or telematics insurance statistics are used, at least in part, by health insurance, life insurance and home insurance companies.

Indeed, those industries could all benefit from extended data collection to personalise user experience, adjust pricing based on behaviour and provide incentives for healthier and more responsible lifestyles. So, although telematics insurance is most known for its auto application today, this could quickly change in the years to come. In fact, it’s been said that Apple may launch a health insurance plan paired with its Apple watch in 2024.

What are the limits of usage-based insurance?

As with all things in life, there are limitations and drawbacks to telematics insurance. Indeed, some users may have privacy concerns, disliking the idea of their driving habits being monitored and their data being used by insurers. Furthermore, the accuracy of telematics devices can be impacted by poor signal, a malfunctioning device or software bugs, which could then lead to inaccurate pricing. Unpredictable pricing due to a high fluctuation based on the driver’s behaviour can also make it difficult for consumers to plan and predict their insurance costs. In addition, it’s difficult to compare pricing plans between insurance offers based on behaviour, so it’s more difficult for consumers to price shop and reduce competition.

Article written by Harold Stern, Senior Analyst at Early Metrics

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