What is usage-based insurance – and why do insurers need it?

It’s not a stretch to say that telematics is revolutionizing the P&C auto insurance industry.

Telematics, which Gartner defines as “the use of wireless devices and “black box” technologies to transmit data in real time back to an organization,” is typically used to collect and transmit data on everything having to do with vehicle status – including vehicle usage, driver behavior and accidents. Telematics can provide first notice of loss (FNOL), accident notification, accident reconstruction and potentially location-based services.

Telematics can serve as the platform for usage-based insurance (UBI), which today is enabling insurers to more accurately price risk. Where a traditional pricing approach is statistical and measured by a group configuration of risk, UBI uses a dynamic approach that incorporates actual individual data to appropriately price risk.

By using driving data collected with in-car ODB-II devices, plug-in “dongles” or smartphone apps, insurers can accomplish a number of objectives. They can attract the safest drivers, provide guidance to increase safety, increase customer engagement and ultimately reduce risk with the portfolio of insured drivers.

For insurance companies looking to better manage their risk portfolio and align it better to the risk they carry, UBI is fundamentally revolutionizing the way insurance is sold.

The UBI model represents a complete paradigm shift from using proxy data and approximations of risk (based on personal characteristics) to actually paying for how you drive. UBI lets insurers move to actual, personalized, individualized usage data.

UBI addresses the underwriting inconsistencies that tend to occur in certain subsets of the population. For instance, as a group, teenagers have traditionally been considered high-risk drivers. However, not all drivers in this age group are reckless – and good young drivers should not bear the high policy costs of the poor drivers. UBI enables insurers to reward good drivers while charging reckless drivers higher premiums.

Insurers are leveraging UBI to ensure that they’re not undercharging someone in a high-risk group or overpricing someone in a low-risk group. Studies show that teen drivers can be wildly underrated in their risk, and drivers over 65 can be dramatically overrated in terms of their risk. And so while the proxies that have been out there do a very good job of estimating risk for those between ages 30 and 55, figuring out risk for drivers outside those categories can be problematic.

Using UBI, insurers can arrive at an individual driving score for each unique insured. The driving score incorporates data on:

  • Driving events, such as harsh braking and rapid acceleration
  • Contextual data, such as whether driving is taking place during the day or at night, on weekdays or weekends and so forth
  • Policy data, informed by local law and incorporating the driver’s age, gender, type of vehicle and the number of years of accident-free driving.

All these elements combine for a well-established, transparent correlation between the driving score and actual risk.

UBI falls into one of three categories:

The pay-per-mile model means that insureds will pay more if they drive more. This doesn’t take into account anything other than mileage.

A contextualized pay-per-mile model expands the first model, not only taking into account miles driven but also where and when the driver is operating the vehicle.

The pay-how-you-drive model not only takes into account mileage and where and when the driving is taking place, but also measures driving behavior.

Of course, the more components an insurer measures, the more precisely it will be able to calculate risk. This is the beauty of having an actuarial platform that incorporates every single element involved in a risk inside your driving score.

There’s no one ultimate, magic, global UBI formula for insurance organizations to follow. Instead, an insurer’s actual approach will vary depending on the region, population and each carrier’s individual UBI program objectives.

Tim Kennedy, Global Product Manager for Usage Based Insurance and Telematics, CSC

Cyril Zeller, Vice President, Key Accounts, Scope Technologies



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  1. Very well explained. I really appreciate the insight here in this post and confident it’s going to be helpful to me and many others. Thanks for sharing all the information and tips.

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