In a prior blog, “Internet of Things: Have We Come Full Circle?”, I explored some of the major transformations that were underway and have since significantly accelerated over the past couple of years. The auto industry, insurers, and drivers have been the major beneficiaries of this acceleration.
For decades, auto insurance companies have relied on an outdated underwriting model to assess driver risk and price premiums. Rather than basing rates on a customer’s driving track record, companies determine insurance rates based on factors that are either outside a drivers’ control (e.g., gender and age) or do not necessarily correspond with individual driving ability, like a credit score. Customers who fall into an arbitrary “safe driver” profile, for example, can still pose a significant risk on the road. Insurers that rely solely on these less relevant data sets to evaluate risk and determine insurance rates can neither effectively reduce costs nor offer relevant products and services to their customers. Usage-based insurance (UBI) solves this problem by monitoring drivers in real-time with their consent.
UBI uses Internet of Things (IoT) technology to monitor driving behavior, including speed and braking, and rewards safe drivers with lower premiums. The process is simple: insurance companies issue cellular IoT connected on-board diagnosis (OBD) modules to drivers, which then track and report data. Customers benefit from more personalized offers and greater premium cost transparency. Insurers benefit from better risk profiling and improved customer satisfaction.
UBI offers three major benefits:
- Accurate driver risk assessment. Telematics data provides a more comprehensive and realistic driver profile. A vehicle telematics device can capture and transmit a range of data, including time of day and journey duration, as well as more sophisticated information about a driver’s behavior, including acceleration, braking, and corner speeds, reports Ovum. This data can then be analyzed to determine a driver’s “safety and risk” profile, allowing insurance companies to reward good driver behavior and more accurately price policies based on driver risk profiles.
- Driver behavior modification and risk reduction. Sensor feedback can be used to modify driver behaviors that reduce the risk level, benefiting both carrier and driver as the policyholder. For example, auto insurers can analyze a driver’s feedback in real time, sending data to a smartphone that can reinforce positive driving behaviors (e.g., speed limit compliance) or alert drivers in real time when risky or dangerous driving patterns are detected.
- Lower customer premiums and increased customer satisfaction. “Pay how you drive” policies could result in a 40 percent reduction in premiums for drivers aged 18 to 23. That’s good news for drivers and insurance companies, who are facing increased competition for the safest drivers. As the UBI market matures, Business Insider predicts “safe drivers will flock to companies who provide a lower rate based on their driving habits”.
UBI models allow insurance companies to pivot away from broad demographic data pricing models, which are under increased legal scrutiny. In 2011 the European Union banned the use of gender-based pricing models for auto, life, and medical insurance, citing evidence that these models were discriminatory and not statistically sound. UBI models provide drivers with a fair rate that is reflective of their driving habits. While the use of gender or other demographic data has not yet been prohibited in the United States, insurance providers are proactively embracing alternative solutions that sidestep these hot button issues. Should discrimination laws change, insurance companies will be one step ahead and will not need to completely revise their pricing structure.
Win-win proposition: Lower rates, safer drivers, and fewer fraudulent insurance claims
Auto insurers like Progressive, Allstate, and State Farm are using IoT to monitor drivers’ habits, including changes in speed, how often they drive, and the time of day they drive, according to a 2015 BI Intelligence report. By 2020, more than 50 million U.S. drivers will have tried UBI insurance, per Business Insider estimates. By granting insurance companies permission to monitor their driving habits, drivers gain access to better premium rates. Embedded blockchain technology can add an additional layer of security and ensure trust concerns are addressed proactively.
As more insurance companies shift to a UBI model, fraudulent claims could also drop. Insurance Journal reported in May 2017 that the UBI model could bring greater clarity to the claims process. Insurance companies could use telematics data gathered in the minutes leading up to a crash to better assess the causes for the accident and determine the legitimacy of claims.
Next steps: Integrating IoT into your insurance model
LexisNexis reports that half of U.S. drivers will participate in UBI programs when asked, but many drivers are unaware that these programs exist. Whether your insurance company is interested in testing UBI on a small or large scale, don’t overlook the importance of reaching out to a captive and eager audience of current customers. Doing so can help your company gain a competitive edge in today’s dynamic insurance marketplace by lowering costs, improving risk assessment, and improving the overall customer experience.
By leveraging the power of IoT, insurance carriers can position themselves as comprehensive “risk managers” in the emerging insurance market.
Watch this video to see how SAP software enables usage-based auto insurance and supports telematics integration in reducing risk and loss ratios.
For more information on IoT, please visit SAP Leonardo Internet of Things (IoT): “Connecting things with people and processes, with real-time intelligence unique to each business.”