Insurance Based on Driving Behavior – 10 things you need to know
The insurance market is one of the most rapidly changing in the services industry. This is primarily because of increased costs of both back office and insurance support, and the system itself, which maintenance is becoming more and more costly. Fraudulent claims are an increasingly common practice and higher customer expectations cause the need to regularly implement changes and new features. Meanwhile, pricing distortions, access to multiple comparably priced offers, difficulties in building long-term relations based on trust and long delays in the processing of claims lead to numerous cases of customers leaving their previous insurers and migrating to competitors.
How to challenge market difficulties?
All things considered, the insurance market can be perceived as very demanding. For some, this strong competition is just another difficulty to overcome, while others are able to draw inspiration to adopt innovative solutions from this.
Many companies challenge difficulties by implementing new products and services based on innovative technologies. One of the examples can be insurance firms that offer telecommunications products based on telematics solutions and driving behavior, i.e. UBI (Usage-Based Insurance).
What Exactly is UBI and how driving behavior is measured?
At the end of 2000, as a niche experiment, several insurance companies offered specific insurance products on their local markets with premiums calculated not according to the period of accident-free driving, but the actual vehicle use and driving behavior. With the rapid growth of access to smartphones and network-connected cars, this product, which was initially designed as a novelty based on a newly created technology, became one of the key offerings of major players in the insurance market.
2 powerful models – Pay as You Drive and Pay How You Drive
The concept of insurance based on telematics provides for several different business models. The first one is Pay as You Drive (PAYD), where the amount of premiums is dependent upon the actual driving time. Another option is Pay How You Drive, where the insurance premiums depend on the individual driving behavior. Unlike Pay as You Drive, where the only factor is the mileage traveled, the Pay How You Drive model provides insurance companies with detailed information on the individual drivers’ activity collected by the telematics equipment installed in the vehicle. User data enable insurers to implement Usage-Based Insurance (UBI), which provides more accurate risk profile and more optimized policy valuation for each customer.
The information affecting the assessment of our skills can be divided into two categories. The first one includes all the data that are directly associated with our driving behavior – such as braking, starting, or turning. They are obtained either from the telematics equipment installed in the car, or your smartphone. This information, referred to as raw information, is then combined with contextual information, the most important of which include speed limits, weather conditions, or time of the day. This set of data is then analyzed by specifically designed algorithms and the individual assessment of the driver’s driving style is made on that basis. Obviously, depending on the needs of the particular insurer, the telematics systems are individually adapted and customized.
Insurance for Millenials (based on driving behavior)
For some such products may seem like the world to come, but the latest analyses of the consulting agency Frost & Sullivan suggest that the appetite for UBI products is very high and will reach the level of 100 million drivers in 2020. Of course, one of the target groups that will form the majority of UBI users are going to be millennials, for whom this product is attractive both because of the ability to lower insurance costs, but also because of the use of latest technologies in this sector of the economy that is usually viewed as rather conservative.
Brand Royalty Factor
With UBI insurance programs, the leading insurers can attract less risky drivers, and additionally increase road safety by providing tips for safe driving. Programs that reward good driving behavior also increase the engagement of drivers and eventually lower the financial risks associated with the portfolio of currently insured. This also affects the process of building strong relations with customers and, with value-added services such as roadside assistance or contextual alerts, customers become more loyal to the particular insurance brand.
Fraud detection as great savings booster
Additionally, modern telematics systems bring great savings for insurers in relation to fraud detection. Estimating costs based on real-time data obtained from a car or phone largely makes financial fraud targeted at insurance companies impossible, increasing the security of operating this type of business. Furthermore, additional savings are achieved through efficient and quick processing of claims, remote reconstruction of accidents, an anticipation of repair costs and a general improvement of customer service.
Why not all will benefit
But it must be noted that not all insurance companies will benefit from these technological changes. UBI is an excellent opportunity to optimize business processes and gain a good portfolio of customers – but only if the implementation of these advanced systems runs smoothly. The changes described here will bring the most to those innovative insurers who use the opportunity quicker than their competitors. By attracting the low-risk drivers, they leave the competition with a pool of higher-risk users who can expose them to losses.
Key to success? Proper implementation
Another issue that needs to be noted is the appropriate planning and efficient implementation of the telematics system. Operating on broad datasets and the need to familiarize with specific hardware requirements can be challenging for the internal IT team. In this case, using the services of software companies that specialize in the development and maintenance of telematics systems is a better option. Cooperation with experienced UBI companies is of key importance for all insurers who aim to overcome the challenges as they appear and present their UBI offerings. The amount of technological and logistical knowledge required to create an effective UBI system is too high for the company to quickly develop on its own. With the help of partners with experience in the field of telematics, insurers can use the best practices and avoid mistakes made during earlier deployments.
Leaders in UBI Deployments
Octo Telematics is one of the global leaders on the telematics market. Its CMO has stated that Octo was born out of dissatisfaction with traditional approaches to insurance that do not really reflect the way we use our cars. The example set by Octo can serve as a litmus paper for the entire industry since it perfectly represents the dynamics of development. Year after year, the company has been recording growth in the field of telematics deployments both in Europe and the United States. Octo ended 2017 with over 5 million users worldwide. This could never happen without a tailor-made, reliable and efficient telematics system, a part of which is made for Octo Telematics by Sparkbit.
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