Telematics and usage based insurance (UBI) have been the great promise for auto insurance for a couple of years now but the exponential growth curve has yet to arrive. Contrary to Matteo Carbone’s fascinating article “UBI Insurance Is not Usage-Based. Sorry, Not Sorry!” I want to present Israel as an interesting example where technological advancement and innovation is yet again a success.
So what is telematics? Matteo writes “A technology that allows persistent monitoring of risk exposure during the coverage period that could potentially enable insurers to price each risk at the most adequate rate.” This is done using sensors that can capture driving parameters such this as braking, speeding and of course mileage (usage) – hence the Usage Based Insurance. This allows a more accurate pricing that benefits with good drivers or consumers with low usage that would otherwise have to pay for more coverage than they need.
Matteo writes that “In 2017, 14 million policies sent telematics data to insurers around the world, of which 4.4 million were in the U.S market, based on estimate(s)” and that “less than 9 percent of the global insurance telematics policies were characterized by usage-based pricing”.
These products have been around for a while and usage based insurance sounds like a good idea, so why are these insurance programs only a small fraction of the market?
I would like to propose a few reasons:
- The telematics technology costs money, either via an OBD, Black Box or app the development, deployment and usage of this technology has a cost. This cost has to be borne by the customer in some way or the other – as there are no free lunches.
- People are naturally reluctant to use something that knowingly tracks all their movements. Ironically we are willing to give the internet giants our data in exchange for a free service that we enjoy using, but to save a few bucks on insurance – guess not.
- With most UBI products, discounts are given due to good driving or low usage. When the discount is based on user behavior this discount can only be given after data is collected – usually at the renewal. There isn’t a real promise upfront.
- Not all drivers are “better” drivers or drive “less” than the average. In a way the policy holder is taking the risk on herself that even though she enters a telematics insurance program she won’t get a discount at all.
So why is it so successful in Israel?
In Israel a few unique conditions make UBI an attractive option.
- Population – In Israel there is a large population of soldiers who rarely drive. For this group, it is clear that the usage is low and a usage based policy is a more economical option than annual.
- The percentage of households with more than one vehicle – under certain UBI policies a young driver can apply his policy to more than one vehicle. This eliminates the need to pay for several policies for the given driver.
We are seeing today other attempts to make the telematics model work, for example the Insurtech carrier Root who guides prospects to download their app in order calculate the driving score through collected data prior to buying a policy. Then, after collecting enough data, a quote is given based also on the driver’s behavior. For the model to work the pricing has to be more exact than the competitor’s – only time will tell if this is a viable strategy.
We are living in exciting times for auto insurance!