The ability of auto carriers to economically collect information about driver performance will be a key factor determining the fate of usage-based insurance programs, particularly for smaller companies looking to compete against the industry’s data-rich giants.

Gathering telematic data for usage-based insurance (UBI) coverage has traditionally depended upon the willingness (and sometimes the ability) of policyholders to plug monitoring devices into their vehicle’s on-board diagnostic system. Recently, more auto manufacturers have been incorporating telematic capabilities into their vehicles. At the moment, however, such systems lack standardization, and in any case it will likely take several years for this technology to be available to a meaningful percentage of drivers, given the pace of fleet turnover.

These factors make relying on devices installed in the vehicle itself a problematic option for UBI carriers, at least in the short run.

Going forward, however, it’s likely that UBI carriers will increasingly monitor a policyholder’s driving experience via their smart phone. Such a move could help overcome consumer concerns about test-driving a telematics program and accelerate the growth of UBI, since policyholders are just being asked to download an app rather than install a new piece of equipment. In addition, drivers can receive real-time feedback on road conditions and their performance through mobile devices. 

From the insurer’s perspective, a move to mobile would eliminate the cost of installing a proprietary monitoring device in the vehicle, as well as expenses for data transmission, making implementation of UBI programs more economical. And since the app resides on what is, in effect, a mini-computer, initial data processing can be done on the device. 

Insurers may also benefit because a mobile app gathers first-hand data on the behavior and performance of the driver carrying the smart phone, rather than the more traditional auto underwriting focus on the vehicle being driven.

These are not mutually exclusive approaches. Indeed, monitoring of drivers together with more standard criteria about the vehicle are complementary efforts that could help create a 360-degree view of the total exposure being underwritten by insurers.

Still, regardless of how driver performance is monitored, insurers will need to collect enough data to identify relevant correlations and create predictive models that produce reliable underwriting and pricing decisions.

Bigger carriers that have already launched UBI programs have the advantage of sheer numbers, in terms of the amount of data they can gather in a relatively short time. For smaller insurers, however, it might take five years or more to collect a sufficient volume and spread of data merely by monitoring their new UBI customers. This lag time could undermine the success of a carrier’s telematics program, and perhaps even discourage small-to-midsize carriers from entering the market in the first place.

One way to clear this hurdle may be to work in concert with other insurers and third-party organizations. In this collaborative model, a group of carriers pool telematics data while concealing the personally identifiable information of their own policyholders. Each participating insurer could thereby access a much wider and deeper aggregated data base than any one of them could generate on their own.

Such an option ultimately would allow smaller and mid-size insurers to compete on a more level playing field with their bigger rivals, rather than perhaps having to concede the telematics field to the industry’s biggest carriers by default.

Meanwhile, even those carriers big enough to collect a sufficient volume of data on their own might benefit from access to a broader pool of driving experience, rather than basing their underwriting and pricing decisions solely on their own policyholder information. Benchmarking a carrier’s particular experience against a larger data set could validate their in-house correlations, as well as provide insights on potential outliers and anomalies.

Meanwhile, as carriers ramp up their UBI book of business, analyzing a much larger data set on driving behavior and incorporating those insights into their evolving underwriting and pricing models will likely offset the investment in a data-pooling arrangement.

In addition, such an investment would likely be relatively modest compared to the amount a carrier might have to spend to catch up to early adopters further down the line, as well as the value of the market share that could potentially be lost should UBI quickly gain widespread adoption.

In our next blog on “Overcoming Speed Bumps on the Road to Telematics,” we’ll explore how insurers might turn raw driving data into actionable correlations and “crack the code” with telematics.