Usage-Based Auto Insurance Could Soon Supplant Standard Policies

Usage-based auto insurance (UBI) is an optional alternative to traditional insurance policies. But according to a new study, it may soon no longer be optional nor non-traditional.

UBI is on the road to becoming the standard for insurers. The top ten companies already provide programs, and innovations in technology are making it more feasible for smaller companies to get in on the action.

According to Boston’s Strategy Meets Action (SMA) insurance consultancy, 70 percent of North American property/casualty insurers have launched or plan to launch UBI programs with three-fourths believing UBI will “fundamentally alter the auto insurance industry between now and 2020,” Insurance Journal reports.

Richard Welch, co-author of the study and representative for REW Consulting, said the UBI experiment has been underway for 15 years and is approaching a moment of transformation. “Even if consumer adoption is in the low end of the consensus range, usage-based insurance will grow rapidly, and as it grows, the traditional market will shrink, making it very difficult for companies not playing in the usage-based segment to maintain market share,” Welch said.

In a separate but related study, the UBI market is moving towards globalization in the next decade, estimating that UBI will represent more than 100 million policies (more than $80 billion) by 2020. The US is the UBI industry leader.

The National Association of Insurance Commissioners (NAIC) added that experts anticipate one in five motor vehicle insurance policies in the United States will utilize UBI within the next five years.

How It Works

Usage-based auto insurance uses telematics devices to track a number of driving behaviors that might include the following:

  • Total miles driven
  • Time of day when most driving occurs
  • Location tracking (GPS)
  • Air bag deployment
  • Hard braking
  • Rapid acceleration
  • Hard cornering

By honing in on the true behaviors of each driver, insurance companies are better equipped to charge a premium that more accurately reflects the driver’s risk level. That’s great for solid drivers; not so great for those on the other end of the spectrum.

But at companies like Allstate, it’s been mostly a winning solution for consumers with a third of all new customers enrolling in the company’s UBI program (Drivewise), which is currently available in around 20 states. Company reps say 70 percent of Drivewise customers get discounts with 100 percent of enrollees not seeing an increase at all. Average savings per vehicle: 14 percent.

“Drivers’ views on UBI are rapidly evolving — they are embracing the technology and making it part of their driving experience,” said Robin Harbage, global lead for Towers Watson’s UBI practice and its DriveAbility product for insurers.

But despite the increasing support, there is one important area of concern for critics: privacy.

In a post-9/11, post-NSA PRISM world, some drivers are understandably leery of allowing any more intimate access to their behaviors. However, most customers trust their auto insurer more than they do their government.

According to LexisNexis, consumers’ interests in UBI spike when they learn about the cost savings. The publisher conducted a survey that showed about 50 percent of respondents were intrigued by UBI when they found it could save them 10 percent off their premiums. At 15 percent savings — around Allstate’s average savings per vehicle — the number of respondents interested rose to 62 percent.

In Summary

Usage-based auto insurance provides a fair pathway to discounts for quality drivers. While not every driver will see the benefits, mainly due to their own driving record, the vast majority will continue to reap the benefits of controlling their own destiny. One thing is certain: UBI is here to stay, and it’s ultimately up to the insured as to whether that’s a good thing.

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