As the concept of usage-based auto insurance (UBI) becomesincreasingly prevalent, global professional services company TowersWatson is working with several large insurers, and has gathered andanalyzed information from thousands of vehicles throughout theUnited States as part of its  DriveAbility serviceoffering. DriveAbility provides analytical support for insurersthat translates to an individual score for each vehicle to bothinform auto policy rating and encourage safer driving habits.

For insurers, UBI offers a new way for companies todifferentiate their products, while also increasing profits andretention as the technology utilizes actual driving data todetermine more accurate premiums. UBI helps customers by not onlyempowering them to improve their rates, but also helps them toselect the most appropriate insurance product for their needs; forexample, parents may select UBI products to monitor their teendrivers.

UBI goes beyond traditional insurance pricing algorithms byusing actual vehicle operation data to measure risk exposure,achieved in near real time. With DriveAbility, insurers can providepolicyholders with personal driving data via the Internet on adaily basis. Studies have demonstrated dramatic reductions in riskydriving behavior with regular feedback.

"Where verified mileage is not already in use as a ratingfactor, usage-based rating offers an immediate upgrade in priceaccuracy," says Robin Harbage, a Towers Watson director. "There arealso major advances in risk segmentation from using more detailedvehicle data. An excellent example of this is traffic density androad type based on when and where the vehicle is actuallydriven."

In addition to the U.S., several usage-based rating initiativeshave emerged globally—in Canada, Europe, Israel, Japan and SouthAfrica.

"Early adopters of UBI will have an enormous competitiveadvantage—the ability to differentiate their products and services,establish new levels of risk segmentation using information knownonly to them, and dramatically improve profits and retention," saysHarbage.

Insurer participation in DriveAbility is growing rapidly. TowersWatson is advising 18 North American companies on their UBIprograms.

According to Towers Watson research, insurers representing 60percent of the personal auto insurance market share haveimplemented a version of a UBI program to insureds in at least onestate. Further, insurers representing an additional 20 percent ofthe private personal auto premium are running or preparing to runinternal UBI pilots. From a geographic perspective, UBI programshave been implemented in each state except Hawaii, and 17 stateshave implemented at least four personal auto UBI programs.

Another arena in which UBI can make great strides is in thecommercial auto market, most notably in the long-haul trucking andsmall, artisan fleet markets. Currently, the technology is beingused primarily for fleet management, rather than for insurancepurposes. Companies are seeing the value of the data and activelytesting the correlation to insurance pricing.