Could 2023 be the year of usage-based insurance?

By Jeff Piotrowski

Did you ever think you’d see a day where a company is actively turning away new business and not renewing existing customers? Such is the world we currently find ourselves in insurance, as raging inflation and increasing catastrophe frequency have sent the property/casualty industry’s top insurers fleeing the largest states in the union, with some carriers turning off new business acquisition entirely until premiums better align with loss risk. As demand for new business wanes, the performance marketing ecosystem has also suffered, with 4 straight months of negative year-over-year growth in online comparison shopping for auto insurance, according to Verisk Marketing Solution’s Auto Insurance Shopping Index.

With an intentionally reduced shopping ecosystem and global insurance pricing rising 6% in the third quarter of 2022, we can expect the challenges of our market to persist into the new year, even as insurers re-enter the market. The year 2023 will require insurance providers to find creative solutions for customer acquisition and retention. And while the current dormancy may cause concern amongst insurers, now is a great time to consider re-working your digital marketing strategies, underwriting practices and product offerings.

At Verisk, we are already seeing an interest from carriers in shoring up their ability to use individual data to personalize the qualification and outreach to current and future customers. And as carriers consider evolving their underwriting appetite similarly, an attractive option to carriers and their customers could be the acceleration of usage-based insurance.

Insurance premiums historically have been calculated with self-reported information, coupled with demographic factors such as age or geographic location to determine risk. Currently, the opportunity exists for direct measurement of behavior through the use of smart and mobile devices, a practice known as telematics. This technology allows agents to align rates and premiums with the consumer’s personal habits and risk profile.

But are telematics the answer to this profitability cycle and the future of insurance, or simply a good idea that is still years away from wide adoption?

Hold on … What are telematics?

According to its dictionary definition, the term “telematics” refers to the branch of information technology which deals with the long-distance transmission of computerized information. These technologies stem from telecommunication innovations that have reduced the cost of connecting associated but remote endpoints: everything from smartphones to temperature sensors. The word telematics implies a bidirectional exchange between endpoints for sensing, measuring feedback or assessing level of control.

Although telematic devices come in many different forms across several different verticals, the most common application of these devices is portable or embedded trackers placed within a customer's car to gauge driver behavior. These devices have aligned auto manufacturers and insurance companies, with both industries recognizing the value of the data collected. Because usage-based insurance programs allow insurers to consider details of individual driving behavior, insurance rating can become less about “the masses” and more about personalized habits. In theory, this 1-to-1 approach to underwriting is good for the carrier, who rates the risk based on the individual and their surroundings rather than the average, and it’s also good for the consumer, who benefits an individualized risk pool, which may ultimately lead to a lower price (or at least a price that fits their lifestyle).

Are we entering the golden age of usage-based insurance?

With claim frequencies and miles driven eclipsing pre-pandemic levels, and premiums increasing by double-digit percentages in many states, insurers may soon find themselves in a great position to attract new customers with UBI or “pay-as-you-drive” plans, especially as cost-conscious shoppers find few lower cost alternatives in the marketplace. In fact, Nationwide projects 70% or more of new business will come from usage-based insurance programs by 2025. The only-pay-for-what-you-need dynamic has long been in the tapestry of our subscription-driven, gig-by-gig economy we have been evolving toward, so sentiment for UBI may be at an all-time high, given the universal interest in cutting back on non-essential spending.

By tracking driving habits such as braking, acceleration, mileage, etc., insurers can assess risk more accurately, giving them more control over who to take on as a policyholder. On the consumer side, drivers can now also examine their own data — and these personal statistics likely overlap with the data their insurance company reviewed when establishing their rate in the first place. Not only does this give consumers insight on how their behavior influences pricing, but it could also encourage safer driving.

A more recent development in UBI for the automotive industry is the pivot from external devices to smart phone apps. Considering that 85% of Americans own a smartphone, this progression is inevitable and has been broadly well-received by consumers who value the convenience of using devices they already own. Smartphone telematics offer insurers the same data as external devices while reducing overhead costs, where providers aren't required to shell out money for expensive hardware. It also divorces the insurer from needing to partner with a manufacturer to receive underwriting data, which enables them to offer UBI, regardless of vehicle make and model.

Could we see telematics usage grow in other industries?

It is possible that telematics could emerge within the health and life insurance verticals. A “pay-as-you-live” (model could be similarly promising for both insurers and policyholders alike, and the technology is already available to make it happen.

PAYL is essentially the healthcare variation of the aforementioned “pay-as-you-drive.'' In this instance, insurers could offer policyholders smartphone applications, external devices or sensors that collect data on things such as heart rate, blood pressure or number of steps taken in a day. Although customers might raise a brow at the thought of sharing this type of data, we’re already seeing major insurance providers launching Apple Watch programs, suggesting that at least a portion of policyholders are interested in sharing their health habits if they see value in return.

Take Aetna for example: In 2019, they launched their “Attain by Aetna” program, which encourages customers to hit personalized daily and weekly activity goals as well as participate in fitness challenges. With this model, customers request an Apple Watch, get it shipped to their door and then “earn” their watch by meeting their activity goals. The watch is paired with an Attain smartphone app that helps users track progress.

An even larger indicator that telematics may have weaved their way into the health vertical is Apple’s plan to launch a health insurance program in 2024. Given that Apple already has a rich dearth of data through their watches and the iPhone Health app, they’re well positioned to disrupt current insurance industry standards.

Since these devices paint a picture of a customer's day-to-day behavior, providers can customize their offerings to better suit individual needs. What’s more, the incorporation of sought-after technology helps marketers attract a valuable and largely untapped subgroup of potential customers in the life and health insurance segments — young people.

The perfect storm of inflation and rising costs, coupled with a cost-conscious customer, in a market where it’s easier than ever to switch, is forcing insurance providers to think differently. Many see the growing adoption of UBI as a way to create a mutually beneficial relationship between policyholders and underwriters.

As technology and the Internet of Things further carve their way into standard underwriting practices, staying ahead of the curve will be crucial for acquiring and retaining quality customers. Participation in telematics programs can be a key ingredient for transforming seemingly futile data points into meaningful customer insights.

Jeff Piotrowski is the insurance market leader at Verisk Marketing Solutions. He may be contacted at [email protected].