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Usage-Based Insurance Explained

Insurance telematics is maturing quickly – more insurance carriers are leveraging telematics-based products every day, policyholders are opting-in at a growing pace, and technology providers are rapidly developing more advanced capabilities. The most common use for insurance telematics in the United States today is usage-based insurance, or UBI.

What is Usage-Based Insurance

Usage-based insurance is a type of vehicle insurance that leverages telematics technology to monitor and analyze driving behavior to determine the risk, and therefore the price, of a policy. By analyzing vehicle sensors, GPS, accelerometer, and gyroscope data, telematics service providers can identify unique driving actions and report on both the frequency and magnitude of these behaviors. While understanding how policyholders are driving is interesting, the real benefit to insurers comes from correlating driving behavior to risk of loss.

 

Why Insurers are Pursuing UBI

Insurance carriers score driver behavior based on their comparative risk of loss and feed this score back into traditional risk pricing models. Usage-based insurance shifts insurance risk pricing from a reactive model, based on static risk proxies to a proactive model, based on observable risks. Rather than supplanting insurers’ underwriting expertise, usage-based insurance enhances the accuracy of their risk models.

The average combined ratio for personal auto insurers was a sky-high 107% in 2016, with increased losses stemming from more people, driving more miles, while more distracted. Insurers are turning to telematics and usage-based insurance to combat this worrying trend. By understanding driver behavior, and therefore the risk of a policy, an insurance carrier can better manage that risk through premium adjustment. In addition, usage-based insurance products can have a significant impact on policyholder acquisition and retention. One study by JD Power shows that participating in a usage-based insurance program resulted in a 10% increase in the likelihood a policyholder would renew with their carrier and an 11% increase in the likelihood they would recommend their carrier. Not only are usage-based insurance policyholders more loyal, they’re lower-risk.

What Policyholders Think About UBI

Policyholders overwhelmingly see usage-based insurance as a fair way to price auto insurance. Usage-based insurance provides policyholders with both transparency into policy pricing and a measure of control over what they pay. Policyholders can see exactly how their driving habits impact their premiums and correct unsafe driving, thereby reducing premiums. While UBI penetration among policyholders only reached around 5% in 2016, a recent report on UBI and consumers shows that half of policyholders who are offered UBI will opt-in to such a product. With auto insurance largely seen as a commodity among policyholders, the up to 30% premium discount goes a long way toward improving policyholder satisfaction.

With benefits for both policyholders and insurance carriers, usage-based insurance is here to stay.

To see how insurance carriers are leveraging telematics and how your company compares, read: The State of Insurance Telematics: Challenges, Opportunities, Adoption, and ROI.

Ji Park