Usage-Based Insurance and Vehicle Telematics: Insurance Market and Regulatory Implications
March 2015, CIPR Study
CIPR Event Explores the Future of Automobile Insurance
January 2014, CIPR Newsletter
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December 16, 2013, CIPR Event
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July 2012, CIPR Newsletter
MIT Pay-As-You-Drive Auto Insurance Study
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Manager, Statistical Information
Last Updated 1/17/2019
Usage-Based Insurance (UBI) is a type of auto insurance that tracks mileage and driving behaviors. UBI is often powered by in-vehicle telecommunication devices (telematics)-technology that is available in a vehicle that is self-installed using a plug in-device or already integrated in original equipment installed by car manufactures. It can also be available through mobile applications. The basic idea of UBI is that a driver's behavior is monitored directly while the person drives, allowing insurers to more closely align driving behaviors with premium rates.
Telematics devices measure a number of elements of interest to underwriters: miles driven; time of day; where the vehicle is driven (Global Positioning System or GPS); rapid acceleration; hard braking; hard cornering; and air bag deployment. The level of data collected generally reflects the type of telematics technology employed and the policyholders' willingness to share personal data. The insurance company then assesses the data and charges insurance premiums accordingly. For example, a driver who drives long distance at high speed will be charged a higher rate than a driver who drives short distances at slower speeds. With UBI, premiums are collected using a variety of methods, including utilizing the gas pump, debit accounts, direct billing and smart card systems.
The first UBI programs began to surface in the U.S. over a decade ago, when Progressive Insurance Company and General Motors Assurance Company (GMAC) began to offer mileage-linked discounts through combined GPS technology and cellular systems that tracked miles driven. These discounts were (and still are) often combined with ancillary benefits like roadside assistance and vehicle theft recovery. Recent accelerations in technology have increased the effectiveness and cost of using telematics, enabling insurers to capture not just how many miles people drive, but how and when they drive too. The result has been the growth of several UBI variations, including Pay-As-You-Drive (PAYD), Pay-How-You-Drive (PHYD), Pay-As-You-Go, and Distance-Based Insurance.
Pricing of UBI
The pricing scheme for UBI deviates greatly from that of traditional auto insurance. Traditional auto insurance relies on actuarial studies of aggregated historical data to produce rating factors that include driving record, credit-based insurance score, personal characteristics (age, gender, and marital status), vehicle type, garage location, vehicle use, previous claims, liability limits, and deductibles. Premium discounts on traditional auto insurance is usually limited to the bundling of insurance on multiple vehicles or types of insurance, insurance with the same carrier, protection devices (like airbags), driving courses and home-to-work mileage.
Policyholders tend to think of traditional auto insurance as a fixed cost, assessed annually and usually paid for in lump sums on an annual, semi-annual, or quarterly basis. However, studies show that there is a strong correlation between claim and loss costs and mileage driven, particularly within existing price rating factors (such as class and territory). For this reason, many UBI programs seek to convert the fixed costs associated with mileage driven into variable costs that can be used in conjunction with other rating factors in the premium calculation. UBI has the advantage of utilizing individual and current driving behaviors, rather than relying on aggregated statistics and driving records that are based on past trends and events, making premium pricing more individualized and precise.
UBI programs offer many advantages to insurers, consumers and society. Linking insurance premiums more closely to actual individual vehicle or fleet performance allows insurers to more accurately price premiums. This increases affordability for lower-risk drivers, many of whom are also lower-income drivers. It also gives consumers the ability to control their premium costs by incenting them to reduce miles driven and adopt safer driving habits. Fewer miles and safer driving also aid in reducing accidents, congestion, and vehicle emissions, which benefits society.
The use of telematics helps insurers more accurately estimate accident damages and reduce fraud by enabling them to analyze the driving data (such as hard braking, speed, and time) during an accident. This additional data can also be used by insurers to refine or differentiate UBI products. Additionally, the ancillary safety benefits offered in conjunction with many telematics-based UBI programs also help to lower accident and vehicle theft related costs by improving accident response time, allowing for stolen vehicles to be tracked and recovered, and monitoring driver safety. Telematics also allow fleets to determine the most efficient routes, saving them costs related to personnel, gas, and maintenance.
The practice of tracking mileage and behavior information in UBI programs has raised privacy concerns. As a result, some states have enacted legislation requiring disclosure of tracking practices and devices. Additionally, some insurers limit the data they collect. Although not for everyone, acceptance of information sharing is growing as more mainstream technology devices (such as smartphones, tablets, and GPS devices) and social media networks (such as Facebook and Twitter) enter the market.
Implementing a UBI program, particularly one that utilizes telematics, can be costly and resource intensive to the insurer. UBI programs rely heavily on costly technology to capture and sensitize driving data. Additionally, UBI is an emerging area and thus there is still much uncertainty surrounding the selection and interpretation of driving data and how that data should be integrated into existing or new price structures to maintain profitability. This is particularly important, as the transitioning of lower-risk drivers into UBI programs that offer lower premiums could put pressure on overall insurer profitability.
Insurers must also manage regulatory requirements within the states that they do business. Many states require insurers to obtain approval for the use of new rating plans. Rate filings usually must include statistical data that supports the proposed new rating structure. Although there are general studies demonstrating the link between mileage and risk, individual driving data and UBI plan specifics are considered proprietary information of the insurer. This can make it difficult for an insurer who does not have past UBI experience. Other requirements that could prevent certain UBI programs include the need for continuous insurance coverage, upfront statement of premium charge, set expiration date, and guaranteed renewability.
Usage-based insurance is gaining popularity and many auto insurers are beginning to offer it as an option to customers. New entrants have also entered the marketplace. Metromile and Root Insurance are InsurTech start-ups that only offer usage-based insurance, as opposed to other insurers that also offer traditional car insurance. In 2014, the NAIC Center for Insurance Policy and Research (CIPR) conducted a study titled, Usage-Based Insurance and Vehicle Telematics: Insurance Market and Regulatory Implications. The study examined how technological advances in telematics are driving changes in the insurance market and its impact on insurers, consumers and state insurance regulators.