Usage-Based Insurance: Is it a Bubble?

There is a consensus in the market that despite all promises and forecasts, UBI has not become mainstream, and it is still in its infancy. Therefore, it is about the right time to stop the race for a moment and examine whether insurance telematics is going to be a success story, or is rather a bubble.



Usage-Based Insurance: Is it a Bubble?
About a month ago, in May 2015, the British Insurance Brokers Association (BIBA) released a research, showing the figures of UBI in the UK. The research showed that the number of live UBI policies is just under 323,000 which represents only 9% growth from 296,000 UBI policies in December 2013.

The annual growth in 2013 was 64%, and in 2012 it was 80%. It could be understood if the market would have reached its apogee. Unfortunately, it is far from that. Another research shows that the penetration rate of UBI in the UK is only 3% of the total.

UK is considered a mature market for UBI, and the figures in other mature countries are not different. In other countries, even in most developed Western European countries such as Germany, Netherlands, Belgium, Austria and Scandinavia the penetration of UBI is much slower.

It is obvious that the propensity of car collisions is higher when the car is moving. Statistics show that in certain road types, road environment, time of the day and days of the week – The propensity is even higher. Therefore, if one can measure those factors, it is possible to assess high risks. The same applies to driver behavior.

Apparently, telematics enables insurers to assess their risk much better than the traditional proxies, and we could expect much higher adoption of insurance telematics.

So, why it is not the case? Why hasn't UBI fulfilled the expectations?

UBI Benefits
So much have been spoken and presented in telematics conferences about the benefits and value of UBI for both the consumers and the insurers. Just to mention few of them:

For the insurance company:
1. Better assessment of the risk, enabling an appropriate pricing
2. Self-selection of "good" drivers
3. Attracting safe drivers from the competitors
4. Developing and strengthening direct relationship between the insurer and its customers
5. Lowering the risk by advising the customer to drive safer

For the insurant:
1. Discounted premium (for "good" drivers)
2. Safer driving
3. Geo-fencing tools and young-driver monitoring

Let's examine honestly –
- Do the above benefits "work" in reality?
- Does UBI provide enough value to the end-customer in order to attract him/her to be "connected" and give-up privacy?
- Does UBI provide enough value to the insurer and justify the high investment?

We have to admit that the answer to all those questions is 'No'. In other words, it seems that the current business model of UBI is wrong. Neither the insurant nor the insurer get enough value to make UBI mainstream and a success story.

Let's imagine an utopian scenario, where 100% of the customers agree to be "connected". Could the insurer monetize it? Could the insurer return the investment he made in telematics (CAPEX and OPEX)? The answer is probably 'No'. As long as the insurer has to incentivize "good" drivers through premium discounts, and unable to reject or surcharge "bad" drivers – He cannot see the ROI. We heard voices from several insurers about surcharging risky drivers, but it doesn't work in reality. Those customers will simply churn to the competition.

As for the end-customer, discounted premium was not proven to be strong enough to "connect" customers and force them to give up their privacy.

Tuesday, July 14th 2015
Ami Mintzer


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