Usage-based insurance

The National Association of Insurance Commissioner’s Center for Insurance Policy and Research (CIPR) recently released the findings of its study on telematics-supported usage-based insurance (UBI). The study examines the fundamental transformation that telematics technology and UBI are having on the US automobile insurance industry, and includes the results of a ten-question survey which was completed by insurance regulators in 47 US jurisdictions. For insurers that currently offer UBI (and for insurers considering entry into the UBI market), the study and survey offer valuable insight into the UBI market, as well as the related issues facing insurers and regulators, and the consumers they serve.

Background

UBI calculates auto insurance premium rates based on actual driver behavior. Policyholders are charged more precise premium rates that take into account exactly where, when, how and how much the policyholder drives her or his vehicle. Mileage and other behavioral data such as braking, cornering or weaving across lanes are captured using a telematics device that sends data remotely from the policyholder's car. The telematics device can be built into the car, self-installed by the policyholder through a corresponding vehicle outlet or even downloaded as an application using the policyholder’s smartphone. The telematics device sends data wirelessly to the insurer who processes the data and sets premium rates accordingly. In general, policyholders who drive more miles, at higher speeds, in more congested areas will be subject to higher premiums than drivers who drive short distances, at slower speeds, in relatively safer areas. When administered and regulated correctly, UBI can effectively align the interests of consumers, insurers and regulators.

UBI can represent a distinct advantage to policyholders over traditional insurance, in which fixed premiums, based on actuarial studies, credit-based insurance scores, personal characteristics or some combination thereof, are assessed annually and typically paid for in advance semi-annually. UBI utilizes recent driving behavior, adding variability to monthly premium expenses which are more individualized and within the control of the policyholder. Low-risk drivers are no longer counted on to subsidize high-risk drivers. Moreover, because policyholders are rewarded for driving less and more safely, it is believed that UBI has the potential to significantly reduce the number of accidents of UBI policyholders, as well as driving related costs such as fuel and maintenance.

Insurers can benefit from UBI by being able to more-accurately assess risk, while the potential for lower premiums provides a strong incentive to policyholders to drive more safely. Public policy makers likewise appreciate the potential benefits of UBI. When administered properly, UBI’s emphasis on less and safer driving can help relieve traffic congestion, reduce fuel consumption, lower overall carbon emissions and decrease infrastructure costs.

Though by no means new, telematics-supported UBI is a growing segment within an otherwise stagnant $170 billion US automobile insurance market. For example, the number of policyholders participating in a UBI program nearly doubled (from 4.5 percent to 8.5 percent) between 2013 and 2014. One market research firm projects the number of UBI policies to grow by approximately 35 percent each year through 2017.

Key issues concerning UBI

A significant investment is required to implement and maintain a telematics-supported UBI program. Success is measured by an insurer’s ability to develop a profitable program while managing the costs of technology, hardware and data storage and analytics. This is expected to become easier in time as technology gets cheaper, data becomes standardized and the analytical tools available for assessing such data become more sophisticated.

On the regulatory front, existing state laws may be discouraging a faster increase in the number of insurers offering UBI programs. For example, laws that require insurers to notify policyholders far in advance of any change in premium make little sense in the context of a UBI program where premiums can fluctuate frequently based on policyholder behavior throughout the year. Similarly, restrictive rate and filing requirements can pose significant hurdles for insurers who wish to protect proprietary statistical information that is subject to public inspection.

State regulators and consumer watchdogs are also concerned about the manner in which telematics data is collected, used and maintained. One study author called the development of telematics a “market failure” from a consumer and public policy standpoint and compared the collection of telematics data to the controversy surrounding the insurance industry's use of credit scoring. Some have pointed out that the use of telematics without transparency could lead to problematic outcomes such as the use of driving data as a basis for denying claims, or have a negative impact on low-income or minority policyholders who are more likely to drive in urban areas. 

There are also concerns about data privacy and security and the potential for release of driving data publicly or to law enforcement.  Consumers are understandably dubious that the benefits of UBI, outweigh the fact that their individual driving habits will be monitored and potentially shared. Studies do indicate, however, that a sizable segment of drivers are receptive to UBI. The CIPR study references a 2014 survey conducted by Deloitte in which approximately 25 percent of respondents indicated that they would be receptive to a UBI program if it meant they could save money on insurance premiums. And  slightly less than half of respondents indicated that they would not allow their driving to be monitored regardless of the potential to save money.

Conclusion

UBI represents an potential opportunity for insurers to capture greater market share in the automobile insurance market. Insurers must carefully consider the costs and risk associated with investing in this still-developing arena. From a consumer perspective, however, UBI is clearly not for everyone.  Data privacy and security concerns remain, and most state insurance departments have yet to promulgate laws and regulations specifically related to UBI. As the UBI market continues to evolve, insurers should anticipate increased state regulatory activity in a number of areas, including rate and form filings, premium fluctuation notice requirements and data privacy and security. Regulators are particularly likely to start making determinations about whether compiled data may be used for purposes other than policyholder rating such as claims investigation, direct marketing and to assist law enforcement.

The NAIC CIPR report can be found here

ICYMI....

Noteworthy links from the past two weeks

General

  • AIG received approval to use drones in its insurance business [Quartz]
  • John Hancock developed the first US life insurance product that offers discounts for customers who allow the company to monitor their workouts and other health-related behavior [New York Times]
  • NYDFS released a report on bank cyber security practices in relation to third-party vendors [New York Times]
  • Massachusetts' Governor decided on a new insurance commissioner [Insurance Journal]
  • City & State magazine profiled the leadership team at NYDFS [City & State]
  • And Rob Easton, NYDFS Superintendent Lawsky's top insurance deputy, decided to leave for the private sector [Reuters]

P&C

  • HSBC and Assurant settled flood insurance "kickback" class action [Law360]
  • Federal flood insurance premiums rose [New York Times]
  • Progressive decided to employ usage-based aggressive driver surcharge in Missouri [Detroit News]
  • NYDFS indicated it is probing potentially faulty engineering reports used in connection with Hurricane Sandy flood insurance claims [International Business Times]

Life & Health

  • The New York Times critiqued the life insurance industry's reserving and accounting practices [New York Times]
  • The Labor Department moved to a 90-day comment period on its proposed fiduciary standard for retirement investment advice [Business Insurance]
  • Plaintiffs claimed that Premera was negligent in allowing data breach [Kaiser Health News]
  • Virginia adopted new rules limiting long-term care rate increases [Insurance & Financial Advisor]
  • The SEC sued a Los Angeles company for fraud in connection with the sale of life settlements [Law360]
  • The Centers for Medicare and Medicaid Services fined Aetna $1 million for errors in telling customers which pharmacies were in network [Law360]

International

  • French insurer AXA SA said too big to fail capital rules could slow economic growth [Insurance Journal]