Entering the Usage Based Insurance Market Through Telematics
As usage based insurance (UBI) and telematics continue to grow, most insurance companies are faced with the daunting task of entering into this market in a timely and efficient manner. Beyond the challenges of hardware, distribution, data gathering and analysis, insurers also have a more fundamental question: how do we enter into the UBI market and begin competing against companies whose actuaries and pricing teams already have years of data and experience?
In this article I will discuss a simple way for companies to quickly ease into telematics, while continuing to gather the UBI data necessary for future integration into their pricing algorithms.
The goal of UBI and telematics is to provide the most effective means to price your auto policyholders. In order to accurately price usage trends, companies require a significant amount of data to analyze. This data may be gathered solely from their telematics-using policyholders, or in combination with their existing data and public filings. Unfortunately, this causes a conundrum for insurers faced with the challenge of quickly introducing telematics and UBI without completely rebuilding their pricing models.
By adding a simple affinity discount, companies can immediately offer telematics to their technology savvy customers and begin to collect the data necessary for future pricing. This allows these companies to gain or retain customers who they would otherwise risk losing to companies already offering telematics solutions.
An affinity discount is a simple way for companies to jump start their telematics program, without significant IT involvement, by implementing one additional discount into their existing pricing structures. Studies have shown that early adopters of telematics have lower loss ratios and are better risks even before segmentation of their driving data. Because of this, offering a small discount for these early adopters poses virtually no risk to a company wishing to quickly enter into usage based pricing.
With this affinity discount in place, companies may take the time to gather data and implement usage based rating, while immediately securing their presence in the telematics marketplace. The timely adoption of this technology is increasingly imperative for companies wishing to stay competitive and retain their highly profitable customers who are interested in savings offered through telematics programs.
Similar to the advent of insurance bureau scores, companies falling behind on telematics and UBI risk adverse selection and reduced profitability. As usage based insurance rapidly expands, companies must decide whether they will quickly implement telematics usage or risk falling further behind the competition.