In today's fast-paced world, interconnected world, industries are constantly trying to leverage digital technology and data to innovate and find relevant and meaningful solutions for customers. One such innovation that's been gaining traction in the insurance sector is usage-based insurance (UBI). UBI has revolutionised the global insurance industry, fundamentally altering the way insurance premiums are calculated and creating a win-win scenario for both insurers and policyholders.
If we look at the numbers, the global market for usage-based insurance (UBI) is projected to reach almost $150 billion by 2027, with an annual growth of over 25%. This staggering growth is driven by several factors, including advancements in telematics technology, increasing consumer demand for personalized services, and a growing emphasis on risk mitigation among insurers.
Originally, insurance premiums were largely based on general demographic factors and vehicle factors. There was a lack of personalised solutions, with customers left to buy only the standardised policy. With the advent of UBI, insurers can now tailor premiums to individual driving and usage habits. The evolution of UBI can be traced through several key stages like telematics introduction. The first phase involved the introduction of telematics devices, which collect data on various aspects of driving behavior. These devices are typically installed in vehicles and transmit data to insurers, who then use it to assess risk and determine premiums.
PAYD was one of the earliest UBI models, where premiums are directly linked to the number of miles driven. This model appealed to low-mileage drivers who felt unfairly penalised by traditional insurance pricing schemes.
Pay-how-you-drive (PHYD)
PWYD takes UBI a step further by truly personalising insurance premium to the individual by linking it to how they drive. This model is particularly attractive for good drivers.
With advancement in mobile technology , telematics could truly be embedded in smartphones thus taking away one of the key barriers for adoption of UBI which was installation of the device in the vehicle. Now an app in the mobile phones can estimate the driving behaviour based on sensors in the smartphones. Further, with data analytics and machine learning, insurers are now able to develop highly personalised pricing models that consider a wide range of factors beyond just driving behaviour. These may include vehicle type, location, weather conditions, and even individual preferences and habits.
Let's delve deeper into why these models are not just a passing trend but a fundamental shift in how we approach insurance.
The appeal of UBI lies in their ability to offer personalised premiums based on individual behaviour.
Take, for example, the case of Abhishek Kumar, a safe driver who rarely exceeds the doesn’t overspeed, has good control of the car avoiding sudden acceleration or harsh braking and generally doesn’t text or check messages while driving. Under a traditional insurance model, Abhishek could possibly end up paying the same premium as someone with a more reckless driving behaviour. However, with UBI, he can potentially save money annually by demonstrating his safe driving habits through mobile telematics based data.
Consider another situation, where again Abhishek has been a safe driver all along but due to some unforeseen incident he meets with an accident. Since the record shows an accident, his premiums would likely go up but with a telematics driven driving score which captures his safe driving habits, he could still get a better price.
But it's not just about cost savings. UBI has the potential to make our roads safer. Research suggests that drivers enrolled in UBI programmes tend to exhibit safer driving behaviors, such as reduced speeding and decreased instances of harsh braking. Our research found that UBI programs push participants to become safer drivers since they provide a driving score, an objective measure of the person’s driving behaviour and most people are wired to improve any score they get.
Privacy concerns are paramount, with many consumers wary of sharing sensitive driving data with insurers. Addressing these concerns will be crucial in building trust and encouraging widespread adoption of UBI models.
(The author is MD & CEO, Zuno General Insurance)