(Photo credit: David Iliff. License: CC-BY-SA 3.0)
When it comes to designing a usage-based insurance (UBI) product, some hurdles are not always easy to overcome. For newcomers to the telematics domain, this includes learning how to use telematics data, how to evaluate drivers’ behavior and risk, and more importantly, how to price them. For most insurers, using driving data directly in their pricing algorithm is as scary as launching the product itself. Hence, Try Before You Buy (TBYB) mobile phone applications are gaining popularity among insurers.
In UBI, it is critical to have enriched telematics data, in other words, that is to have a data filtered from unwanted GPS noise and cleaned. Enriching the data means adding layer after layer of information about each trip, for example, adding the speed limits, road types, weather conditions, traffic density and average traffic speed, etc. For a usage-based insurance product to work, insurers need to gather enough data to have a clear understanding of risks and be able to mitigate them.
Launching a telematics product without having any knowledge about actual risks on the road makes insurers reluctant to offer telematics-enabled premiums to their customers.
For many insurers, this means waiting and waiting without making a decisive move. For a few others, this means working with a telematics service provider (TSP) with extensive knowledge about telematics and scoring, ideally those with a decent amount of telematics historical data. Working with an experienced TSP is a wise move, but it comes with a high price tag.
For these reasons, insurers are now actively pursuing a familiar concept called ‘Try Before You Buy’ (TBYB). A typical approach that is now commonly observed in Europe is for insurers to develop a smartphone application that gathers driving data via GPS and Gyro sensors. Then they offer this new app for free to all or only the younger segment, promising them that if they score “good” or above, they will be entitled to receive a discount on their new policy.
Most programs in the U.K. are now offering a discount of up to 20 percent for good driving habits, e.g., keeping within the speed limits, no harsh acceleration, braking and cornering and, finally, being extra cautious during rush hours and early and late times of the day.
According to Co-Op Insurance, one of the first major insurers to bring telematics to the market in the U.K., between March 2011 and January 2016, the level of discount was up to 22.5 percent off the premium and was dependent on a driver’s driving score over the year. Similarly, Aviva has launched its Aviva Drive Challenge, promising safer drivers an average saving of £170 on Aviva comprehensive car insurance. The same concept was launched in 2015 in Norway by Codan Insurance.
All TBYB programs come with a catch. The driver has to complete 200 miles, at least 10 trips and in most cases, this cannot be done in one go. This is what makes the TBYB model an excellent catalyst for UBI penetration, at least in the EU.
The whole purpose of TBYB is to collect telematics data for free while selecting good drivers along the way. It is also an attractive solution since insurers can gather sufficient data to understand driving scenarios and risks without paying out claims. It is also an effective market entry strategy for insurers with less experience of telematics data.
From the end users’ point of view (as long as they become aware of the program), it is a win-win proposition. They receive insights and after-trip feedback regarding how they drove or how they can improve their driving skills in the short-term. This can lead to them becoming more comfortable with the idea of sharing their location with third parties in return for receiving a service in the medium-term and finally receiving a cheaper premium by adopting safe driving habits in the long-term.
To sum up, UBI will not become mainstream as many have forecast unless insurers find a way to understand the risks before the insurance policy begins. The Try Before You Buy model is an attractive way to speed up this process by offering drivers a smartphone application that gathers driving data. Volunteers who enter the program can receive a discount while insurers gain a lot more by collecting the driving data.