Telematics and usage-based insurance (UBI) are among the hottesttopics in auto insurance. Rather than creating broad ratetiers by looking backwards at the performance of a book of businessit promises the ability to create more granular pricingsegmentation and improve the accuracy of pricing by using acustomer's actual driving behavior as the basis for generatingrates. The feedback provided to drivers has potential for actuallychanging driver behavior to safer levels.

Although UBI is not widely available or even widely understoodamong consumers, the adoption rate of the technology is slowlypicking up speed as insurers develop UBI programs to add to theirofferings for both personal and commercial lines of business. Thereare many important areas to assess for carriers consideringentering the UBI market. The technology is still evolving, andthere are several business models to evaluate. UBI comes with realcosts, so carriers need to evaluate their optionscarefully.

The first area to evaluate is whether UBI fits with a carrier'sstrategic market. Carriers looking for long-term, “preferred”customers will likely find this a good match with their strategy.But carriers who focus on the sub-standard market, or short-termpolicies may not benefit from UBI because of the cost of theinfrastructure needed to support it.

Assess not only which of your customers are likely to switch toa UBI based program, but also what the implications will be forthose customers who don't switch. Drivers that demonstratesuperior driving skills will certainly earn a lower premium. However, those drivers that don't switch are likely to experiencehigher prices due to the normal skewing of rate distributions. Youmay need to plan for a higher defection rate from thosecustomers.

Those who are considering moving forward have different businessmodels to evaluate. Two dominant business models are being used inthe industry today. Pay as You Drive (PAYD) typically charges acustomer based on actual, documented miles driven. Pay How YouDrive (PHYD) generally bases pricing on a variety ofdimensions related to the driving behavior of the customer—such asrapid accelerations and decelerations, to the time of day, theroutes driven, and the territories driven through. Carrierscan either use installed devices and collect granular driving datathemselves, or can work with a provider who sends them aggregateddata—think of it as a driving score—that can be used as input torating models.

The decision over whether to choose PAYD vs. PHYD hassignificant implications for carriers as it affects the technologyrequirements, and influences how they can utilize telematics as aservice offering for their customers. If a carrier isplanning to utilize an installed device, additional considerationsapply such as how to distribute the device, install the device,provide customer support for the device, collect data from thedevice, and retrieve the device back in the event of customerdefection.

A major consideration in UBI roll-out is the existence ofProgressive's patent for UBI, which has been a barrier to entry forcarriers. The Progressive patents are extensive, covering, “Amethod and system of determining a cost of automobile insurancebased upon monitoring, recording and communicating datarepresentative of operator and vehicle driving characteristics …[including] an operating state of the vehicle or an action of theoperator.”

Carriers who wish to apply to use the Progressive patent mustapply by the end of June. If approved, carriers will be permittedto rate customers under the Progressive patents beginning in April,2015.

What should a carrier do during those years of waiting beforethey are permitted to use the data for rating purposes? Somecarriers are looking at providing telematics capabilities as acustomer service. They are planning to use the time toevaluate the collected data, but not use the data as an input forrating. Examples of services considered by carriers includesafe driver coaching, automatic crash notification/emergency call,crash data management, stolen vehicle tracking, geo-fencing, remoteaccess, and vehicle diagnostics.

Once a carrier has completed their strategic assessment, datamanagement issues must be evaluated and preparations made. Aplethora of data about driver behaviors may be available and acarrier needs to assess which data should be collected, stored, andused for analysis. Carriers may need new technology infrastructureto store, organize, cleanse and manage the data. Additionalskill sets may be needed to take full advantage of this new datathrough sophisticated analytics, data mining, and modeling.

While it may be tempting to sit back and watch the UBI marketrather than leap in, opportunities across the value chain exist forinsurers who adopt the technology early, especially now as the mainbarriers to entry are falling. Insurers that wait too longpotentially face adverse selection and may be left mostly withcustomers who don't suit their pricing model.