As technology around car manufacturing has gotten more sophisticated and the needs of consumers around car ownership have evolved, so has car insurance. Usage-based insurance (UBI) capabilities are on the rise across insurance carriers, offering personalized premiums for drivers and an additional insurance product for carriers.
According to the National Association of Insurance Commissioners (NAIC) Center for Insurance Policy and Research (CIPR), “Usage-based insurance is a type of auto insurance that tracks mileage and driving behaviors. UBI is often powered by in-vehicle telecommunication devices (telematics) — technology that is available in a vehicle that is self-installed using a plug in-device or already integrated in original equipment installed by car manufactures. It can also be available through mobile applications.”
By tracking driving behaviors, including speeding, mileage, time of day, braking and a myriad of other safety measures, depending on the type of telematics and the amount of information a driver wants to disclose, UBI can determine drivers’ premiums more precisely. This is very different from the use of actuarial tables based on historical data that insurance companies typically use to determine premiums.
Although some consumers have concerns about privacy, many states have enacted legislation that requires disclosure of any tracking or monitoring, and many insurers are limiting how much information they collect. Young people, who often are more comfortable agreeing to share information, are likely to be drawn to UBI. A Towers Watson study found that 62% of Millennials would be interested in a UBI insurance policy and 84% of Millennials would “completely change their driving behavior to benefit the most from usage-based insurance.”
And, a report by Deloitte believes that the UBI “genie is out of the bottle” and “the industry as a whole is not likely to go back to relying only on its traditional methods of assessing auto risks.”
Currently UBI is a $25.46 billion industry, and it's projected to reach $77.25 billion by 2026. A new study by Valuates Reports predicts a compound annual growth rate in the UBI market of 20.32% in the next six years. Valuates Reports also found that UBI’s growth can be attributed to the dominance of smartphones and advances in car technology.
The growth of UBI could present some challenges for insurers who may face a “bifurcated” market with competing products. However, CIPR notes, “The use of telematics helps insurers more accurately estimate accident damages and reduce fraud by enabling them to analyze the driving data (such as hard braking, speed, and time) during an accident. This additional data can also be used by insurers to refine or differentiate UBI products.” Insurance carriers interested in marketing UBI will need to target products to consumers who are receptive to the technology and willing to see how telematics can work for their car insurance needs.