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Auto insurance existed for about 100 years before the first usage-based insurance (UBI) programs came to market. Early UBI programs used aftermarket hardware, quickly moving from professionally installed to self-install devices plugged into a vehicle’s OBD-II port. Millions of OBD-II devices were used before smartphone-based technology became the primary technology solution. Once less costly for insurers and more accessible for the consumers, insurance carriers began investing more promotional resources into their UBI programs.
However, UBI still isn’t viewed as a default component to be used in the pricing of car insurance. Why?
Even with its inherent cost advantages and proven data accuracy, a mobile app solution is still an aftermarket UBI offering. We also understand that virtually all automotive innovations scale once they are an embedded feature (e.g., CD player, navigation system, backup camera, etc.). With embedded connectivity becoming standard on more vehicles, I fully expect telematics exchange data will transform UBI from a successful-but-niche concept into an everyday part of people’s lives.
Telematics exchange data is available today
As a quick two-second refresher on telematics exchanges, they operate as a neutral space for incoming consented driving behavior. The key component is being able to ingest data from multiple sources (connected cars, driving apps, OBII, etc.) and bring that down to a common language i.e. “normalized” and ready to serve as part of an insurer’s workflow.
Connected car data serves as the primary source for telematics exchanges, and many insurers question if enough connected car data is available today to support an insurer-led program. To dispel any apprehensions towards volume, a standard telematics exchange can store hundreds of billions of driving miles, with more added every day. All at the ready for insurers to leverage regardless of their experience with telematics.
Suppose a mid-sized, Fictional Insurer, for example, has a market share of 0.17 percent, insures roughly 310,000 vehicles, and adds about 1,000 policies or 2,000 vehicles each month (no churn in this analysis). In that case, a 0.17 percent market share of 24 million vehicles suggests that Fictional Insurer’s current book of business includes more than 40,000 connected vehicles whose owners share their driving data for insurance use cases.
Tapping into drivers who have taken advantage of the option to share their driving data is a lot simpler to launch and scale than tackling distribution complexities with varying agent models, sales (training) difficulties and customer journey issues, including consumers opting in to share their driving data, that come naturally with the implementation of an aftermarket program. In my opinion, to enter the UBI space and hit designated volume thresholds, a faster implementation path is through a telematics exchange-based program.
The user experience is more seamlessly embedded, not just the technology
Consumers are interested in saving money on auto insurance, and the insurance industry has traditionally attempted to turn this desire into an opportunity to improve engagement. But it’s been a difficult 15 years of insurers attempting to market aftermarket UBI products to an audience expecting to purchase insurance services because the insurance ecosystem traditionally does not manage products. Agents do not customarily manage inventory or have the proper tools to market mobile apps and related UBI programs to insureds in a retail setup.
When an agent gets a consumer to sign up for the UBI program in exchange for an initial discount, potential failure points may follow in a customer’s journey. Downloading the app and registering can be cumbersome. Despite insurers’ and their vendors’ hard work, mobile operating systems consistently introduce new hurdles such as battery drain, updates, and configuration requirements. Conversely, the benefit of the telematics exchange approach is the absence of all these steps for both consumers AND insurers, allowing agents to focus on what they know best—the resulting impact on policy price or the potential benefits of sharing the telematics data.
Telematics exchange data is more cost-effective
UBI app programs are generally priced as subscription-based products, where insurers pay a monthly license fee to a third-party vendor who built and maintains the mobile app. Telematics exchange solutions, on the other hand, are generally priced based on a transaction model—an insurer pays only when the telematics data is accessed.
To compare the costs, we use the general price points of $1/month per user for a UBI app program and $3 per transaction for a telematics exchange program. A UBI app license fee directionally costs $12 per user/year. In contrast, a telematics exchange product directionally costs $6 per user/year (one transaction at new business and one at renewal for a 6-month policy). That’s a 50 percent reduction in cost! This doesn’t include additional internal overhead expenses like program management, training, marking, etc. The cost savings can be even more remarkable.
A misconception exists that telematics exchange data from connected cars is only valuable to larger insurers who can “afford” third-party data provider relationships, but when one looks at both the potential volume available and the estimated cost savings, it may be even more valuable to small-to-medium size insurers, given the relative impact to the overall book of business and available budget to launch a UBI program.
There is little doubt technology enhancements have helped auto insurers grow their UBI programs from a concept test to a fully marketed competitive offering.
However, telematics exchange data may be the missing piece to realizing the full potential of UBI as an assumed part of auto insurance. Not just because it’s more cost-effective but because it’s easier for both insurers and consumers to realize the benefits. And now that the volume is available on a large scale, (don’t) be surprised at how fast an insurer can grow a UBI program with telematics exchange data.