Usage-Based Insurance: Is it a Bubble?

Ami Mintzer

There is a consensus in the market that despite all promises and forecasts, UBI has not become mainstream, and it is still in its infancy. Therefore, it is about the right time to stop the race for a moment and examine whether insurance telematics is going to be a success story, or is rather a bubble.

About a month ago, in May 2015, the British Insurance Brokers Association (BIBA) released a research, showing the figures of UBI in the UK. The research showed that the number of live UBI policies is just under 323,000 which represents only 9% growth from 296,000 UBI policies in December 2013.

The annual growth in 2013 was 64%, and in 2012 it was 80%. It could be understood if the market would have reached its apogee. Unfortunately, it is far from that. Another research shows that the penetration rate of UBI in the UK is only 3% of the total.

UK is considered a mature market for UBI, and the figures in other mature countries are not different. In other countries, even in most developed Western European countries such as Germany, Netherlands, Belgium, Austria and Scandinavia the penetration of UBI is much slower.

It is obvious that the propensity of car collisions is higher when the car is moving. Statistics show that in certain road types, road environment, time of the day and days of the week – The propensity is even higher. Therefore, if one can measure those factors, it is possible to assess high risks. The same applies to driver behavior.

Apparently, telematics enables insurers to assess their risk much better than the traditional proxies, and we could expect much higher adoption of insurance telematics.

So, why it is not the case? Why hasn't UBI fulfilled the expectations?

UBI Benefits
So much have been spoken and presented in telematics conferences about the benefits and value of UBI for both the consumers and the insurers. Just to mention few of them:

For the insurance company:
1. Better assessment of the risk, enabling an appropriate pricing
2. Self-selection of "good" drivers
3. Attracting safe drivers from the competitors
4. Developing and strengthening direct relationship between the insurer and its customers
5. Lowering the risk by advising the customer to drive safer

For the insurant:
1. Discounted premium (for "good" drivers)
2. Safer driving
3. Geo-fencing tools and young-driver monitoring

Usage-Based Insurance: Is it a Bubble?
Let's examine honestly –
- Do the above benefits "work" in reality?
- Does UBI provide enough value to the end-customer in order to attract him/her to be "connected" and give-up privacy?
- Does UBI provide enough value to the insurer and justify the high investment?

We have to admit that the answer to all those questions is 'No'. In other words, it seems that the current business model of UBI is wrong. Neither the insurant nor the insurer get enough value to make UBI mainstream and a success story.

Let's imagine an utopian scenario, where 100% of the customers agree to be "connected". Could the insurer monetize it? Could the insurer return the investment he made in telematics (CAPEX and OPEX)? The answer is probably 'No'. As long as the insurer has to incentivize "good" drivers through premium discounts, and unable to reject or surcharge "bad" drivers – He cannot see the ROI. We heard voices from several insurers about surcharging risky drivers, but it doesn't work in reality. Those customers will simply churn to the competition.

As for the end-customer, discounted premium was not proven to be strong enough to "connect" customers and force them to give up their privacy.

Usage-Based Insurance: Is it a Bubble?
Is UBI a Bubble?
The above draws a gloomy picture. However, the fact is that we see more and more conferences around UBI, new vendors join the game. Is it a bubble that is about to explode?

Not necessarily, but there is a need for a radical change in the business model.

Connected car is much more than UBI. Therefore, the existing model where the insurer collects the driving data, owns it and uses it for insurance purposes only (underwriting, marketing, and claims management) is completely wrong. The insurer cannot see the entire picture of connected car services, and honestly – Most of the insurers are not interested in more than insurance.

So, what is the right way to make connected car a success story, and UBI part of that success?

Keeping the Customer Engaged
Pardon for the analogy, but it in order to encourage dolphins to do their show you must feed them with fish continuously. The same is with customers – It is a must to keep them engaged and provide them monetary value on daily basis, so they will be intrigued to be "connected". A very good example for that is the 'Rewarding' method of Wejo, where a customer collects miles and good scoring and can redeem it for free coffee, car wash or MOT test. When a customer feels that he/she gets real value, they are easier to give up their privacy.

Ami Mintzer
Ami Mintzer
UBI as part of a Broader Suit of Telematics Services
Insurers that offer additional services, such as: roadside assistance and extended car warranty, can use the telematics device in those services. In that case, they can either cover the costs by the customer, or spread the cost over the several uses and justify the investment.

A Winning Ecosystem
As mentioned above, insurance companies cannot see the entire connected car picture, and therefore are not the ideal entity to collect and own the driving data. Moreover, as long as they cannot reject or surcharge "bad" driver, why would they fund telematics (devices, connectivity, device management, data analytics) for those customers, if they can purchase database of "good" drivers from a 3rd party?

Therefore, we can expect in the near future to see the rise of telematics facilitators/aggregators who will collect data from the vehicle, own it – in return to providing value and engagement to the customer, and form a winning ecosystem of multiple players who can benefit from telematics data and insight. Once they have a mass amount of data, they will be able to driver behavior analytics and monetize it towards insurance companies.

What will be the profile of such facilitators/aggregators? Obviously, OEMs can play this role for embedded OEM devices. In the aftermarket telematics, we already see some cellular operators that are heavily involved in the connected car space, and we can expect more to come. Other optional players may be existing TSPs and UBI vendors who will see the potential in a multi-player game, as well as new entrepreneurs.

The bottom line is that UBI is here to stay, but its business model will radically change.

I'm personally open to join companies that share the same vision.

About the author
A seasoned business developer with vast experience of 18 years. Ami Mintzer has a proven track record in identifying, designing, setting up, delivering and developing new projects and businesses in the field of telematics and road safety. In his last position he served as a VP International Sales and Business Development at MyDrive Solutions from London, a worldwide leader in driver behavior profiling.

Previously he was a VP Sales and Business Development at Life-Changing Experiences, and initiated a global road safety program for young drivers. Back in his career, Mr. Mintzer worked 15 years in SW development and system analysis, where he gained good technical understanding.

Disclaimer – The opinions expressed herein are the personal opinions of the author and are not necessarily those of GPS Business News.

Comments (1)
1. Tim Hothersall on 10/09/2015 12:02 PM
1 A connected vehicle is a hackable vehicle.
2 The government are renownd for using drivers as a cash cow, the data that a connected vehicle transmits will cost the insured a fortune in fines.
3 I like my privacy.
4 97 percent of drivers comit a motoring offece every day (usually speeding on the motorway).

Not exactly a long list of cons to UBI, but a very compelling one.
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