Can auto insurers seize an opportunity to potentially grow bymore than 10% without directly engaging their competitors' clientbase?

About one in eight U.S. drivers doesn'tpurchase insurance, representing an intriguing and untapped marketfor insurers. Usage-based insurance (UBI) may raise a compelling opportunity to connectwith this lost segment.

Each state typically requires vehicle owners to carry minimumlevels of liability insurance coverage, although low penalties andineffective enforcement potentially help millions of uninsureddrivers to avoid any real consequences. If insurers offer greaterlimits of uninsured motorist (UM) coverage — and if statesstrengthen their auditing of uninsured drivers — this may helpmitigate the risks that the UM cohort poses to fellow drivers.

Related: Big data set to rewrite the UBIplaybook

Yet these approaches are not geared toward the realities facingindividuals who opt out of insurance. That segment faces penaltiesand, in the worst scenario, potential financial ruin in the eventof an accident. Consider this: If a single carrier enrolled all ofthese uninsured drivers tomorrow, it immediately would become thesecond-largest auto insurer in the UnitedStates. Why then do so many drivers remain uninsured, and how caninsurers tailor UBI and other solutions to perhaps better meettheir needs?

Cost barrier

Cost is among the leading concerns of drivers who don't buyinsurance. Premium rates are traditionally based onfactors that include a policyholder's geographic area and personaldriving record. Individuals who garage and drive their vehicles incongested areas, therefore, may pay higher rates. Data suggeststhey are at greater risk for accidents that result in claims.

Limited ability to reliably measure a policyholder's mileage hascontributed to many insurers assuming a minimum annual level, suchas 3,000 miles (approximately 10 miles per weekday), whendetermining premiums. Recently, insurers have received rave reviews for pay-per-mileUBI programs marketed toward millennials residing in metropolitanareas. Such programs use devices that plug into a vehicle's onboarddiagnostic ports to record miles driven. Policyholders are thenbilled per mile, allowing them to lower their insurance coststhrough reduced discretionary driving (for example, by carpoolingor using public transportation).

Related: The 10 U.S. states with the cheapest auto insurancerates

Individuals with checkered driving histories may havelimited auto insurance options. (Photo: iStock) 

A checkered record?

The second reason some drivers forgo insurance may be their lackof "insurability." Drivers who have had numerous accidents orviolations, but have somehow retained their license, may not beviewed as sustainably insurable. Individuals with checkeredhistories may have limited options in the voluntary market andtherefore be driven into the "residual" market.

Behavioral UBI may present opportunities for drivers to restoretheir insurability and gain access to the voluntary market. SomeUBI programs have allowed policyholders essentially to purgeaccidents or violations by demonstrating responsible driving—forexample, by no longer speeding. Many programs provide specific and detailed feedback to reportedly improvebehaviors, basing their analysis on a policyholder's driving data.Although there's limited evidence that behavioral UBI has reducedthe size of the residual market, many of its tools have thepotential to advance this goal.

A third reason drivers may go uninsured is a state of mind knownas the "invincibility complex." Nearly two-thirds of Americans reportedly considerthemselves "excellent" or "very good" drivers, and up to 80 percent consider themselves to be "above average."Since they may perceive their accident risk to be low, some mayelect to take their chances without insurance.

UBI can help separate fact from fiction. For example, an insurance telematics data exchange may usedata collected by vehicles to provide policyholders with UBIdiscounts based on their driving style. Demonstrably safer driversmay qualify for deep savings and purchase coverage on those terms.Drivers with less than safe records may find their score pointingthem to a need for greater protection and choose a non-UBI programor a behavioral UBI program that rewards improvement. Much likeseeing their speed on a roadside sign persuading them to slow down,knowing their driving score may lead some drivers to purchase moreinsurance coverage.

Related: The telematics advantage: driving data on thespot

Financial misconceptions regarding insurance are a fourth reasonsome may forgo coverage. Without an understanding of the concept ofrisk pooling, for example, some drivers might regard insurancesimply as a one-sided transaction that takes from the policyholder,providing minimal prospects of a short-term return.

Even so, pay-per-mile and behavioral UBI may counter perceptionsof one-sidedness, because costs increase with exposure and decreasewith safer driving, as opposed to what often becomes a one-timehandover of funds. Many UBI programs offer value-added services,including street-sweeping alerts, vehicle health reports, andrewards points. Those incentives can give policyholders additionalsavings, making an insurance transaction feel more multilateraleven when a policyholder is fortunate enough to avoid a claim.

The world moves on

A final reason drivers may forego insurance is that standardpolicies have become less relevant to their needs. For example,most cars sit idle 90% or more of thetime, according to one study. To help address this, automakers haveexplored new vehicle ownership agreements. In February 2016,Ford began testing shared car leasing toself-organized groups of three to six people.

Claims Journal described the question of whetherinsurance follows the driver or the vehicle, subject to variationsin law, as a "MENSA brain teaser." Ford may have determined thatcurrent insurer underwriting guidelines may not address theirshared car leasing program and found an insurer partner for the insurance component.While the ensuing policies currently don't involve UBI, this modelseems tailor-made for shared ownership. It can allocate insurancecosts to operators of a vehicle based on the time, location, andrelative riskiness of their driving. Some tests suggest thatdriving data collected through smartphones is 95% effective in differentiating driver versus passenger. So,while plug-in devices and vehicle connectivity have been choicetechnologies for UBI programs to date, smartphone-based UBI may bewell suited to address the evolving coverage needs ofpolicyholders.

UBI has been characterized in many ways — as an incentive forpolicyholders to switch carriers, a tool to drive retention, a losscontrol teacher, and an efficiency play with potential to span theentire policy life cycle. With all those possibilities, it's easyto forget that roughly 10 percent of the insurable population optsout of the system. But with a more coherent and relevant insuranceproduct, UBI may better equip insurers to grow their markets whileserving the underserved.

Jim Weiss, FCAS, MAAA, CPCU, is director of analyticsolutions at ISO Insurance Programs and Analytic Services. ISO is aVeriskAnalytics business.

The opinions expressed here are the writer's own.

 See also:

Telematics in auto claims isinevitable

The expanding role of telematics