Choosing a Strategic Direction – UBI Offers Insurance Companies a Number of Clear Benefits
The automotive insurance industry operates on a fundamental principle of calculated risk, determining rates by predicting the likelihood of an individual filing a future claim. The factors that underlie risk assessment and predictive analysis—which are designed to effectively determine the potential for future claims—vary, depending on the type of insurance plan and how that plan is implemented.
Any business considering an insurance telematics program should carefully evaluate how well the program fits into the company’s mission, as well as its overall business goals and long-term strategy. Most insurance companies are built around one basic idea: helping individuals cope with those expensive, life-changing events—whether fire, accident, or health crisis—by pooling funds from a wide customer base to cover costs. Doing this effectively as a business requires being able to gauge the risk factors, predict the frequency of costly events with reasonable accuracy, and find ways to lower or manage risks.
WHAT ARE THE BENEFITS OF UBI?
In the case of UBI, the risk factors and variables being evaluated overlay the traditional rating methods—typically, age, gender, marital status, credit and driving records, and insurance scores—which have proven over time to have predictive capabilities. UBI extends the range of relevant data and makes it possible to evaluate risk based on each individual’s real-world driving behavior, inclinations toward safe or dangerous driving practices, trip characteristics, the current condition of the vehicle, the locale of vehicle operation, weather factors, and more. Combined with traditional rating variables, UBI proves a better assessment of risk, insurers could offer the best drivers the maximum discount and still maintain a reasonable level of profitability.
Deploying the appropriate technologies for UBI and analytical tools to acquire and evaluate driving data generates expenses—including cost of preparation, manpower, technology and equipment, logistics, and support.
However, these costs are generally justified by the business benefits of usage-based insurance:
- Attracting low-risk drivers
- Enhancing customer loyalty
- Reducing claims costs
- Increasing the number of potential touch-points per year
- Providing personalized, revenue-generating, value-added services to insurance plans to serve customer interests more effectively
Telematics can be used as a strategy to help insurance carriers improve their position in the market by adding low-risk drivers to the customer base, using driving data to improve pricing, enhancing the customer perception of the company as being more technologically advanced, and strengthening long-term relationships through closer communication. When developing a telematics program, specific strategies can increase the odds for success, including careful planning and testing, the use of value-added services, the manner in which customer relations are handled, the pricing model, and effective use of data analytics within the program.
Overall, it’s clear the automotive insurance market is changing and changing rapidly. Those insurance providers who get involved with usage-based insurance programs early will have a distinct advantage over those companies who wait and risk losing valuable customers to their more innovative competitors.
We recommend that anyone interested in exploring the benefits of usage-based insurance or building a business case for UBI contact an experienced, knowledgeable telematics service provider (TSP). They can help you carefully evaluate and understand the business case scenarios most appropriate for an insurer. The right TSP can also help identify the business case best suited to each individual business’s strategy— the necessary foundation for implementing a successful program.