Usage-based insurance (UBI) is still in its early stages and has a long way to go before it becomes the norm in insurance. With this in mind, there is no denying that UBI will be the future of auto insurance. Although the groundwork has already begun to be laid, the question remains: How will UBI appeal to consumers? How does it become a mass market offering?
As the name suggests, usage-based insurance has two popular car insurance models: Pay As You Drive and Pay How You Drive. The pay-how-you-drive model uses advanced telematics technology, where detailed driving data such as hard braking or rapid acceleration can influence insurance premiums. Such a detail-oriented system can not only transform insurance, but also completely reform driving. Focusing on the unique selling points of usage-based insurance can definitely attract the auto insurance market.
Pay as you ride
Originally, driving information was collected to investigate accidents or insurance claims. However, the need arose to develop this technology a step further, which led to the introduction of the Pay How Your Drive system. Implementing this model requires collecting real-time driving data – calculating every rapid acceleration and hard braking, average speeds, driving frequency, usage information such as locations, parking spaces, etc. and combining it with historical data to create an insurance plan and assign premium values.
Pocket friendly
Any initiative that can save money will appeal to the mass market. In an economic situation as difficult as crossing the Bermuda Triangle, consumers are constantly looking for ways to reduce costs. The usage-based insurance model combines telematics, analytics and shared data to calculate an insurance policy that won’t eat up your wallet. The insurance premiums are determined based on this data. For example, if the policyholder does not use his vehicle frequently and is a very careful driver, his insurance premium will be comparatively lower.
Insurance agencies also benefit from this model. For example, in the event of a car accident, telematics can capture real-time driving data and determine exactly how the accident occurred and what damage was caused, thereby preventing fraudulent claims and reducing the risk of loss.
Incentive-based system and customizable features
A careful driver pays far less than a reckless one. However, improving driving behavior does not go unrewarded. Who doesn’t love rewards and perks! UBI uses an incentive-based system to encourage better driving. If the insured person improves his driving style, his premium amounts will inevitably decrease.
Insurers also offer other tailor-made services, which vary depending on the insurer. These features may include driving tips, roadside assistance, geo-fencing, location information such as gas stations, restaurants, etc.
Conditioned to drive safely
BF Skinner had conducted an experiment to study the effects of rewards and incentives. He put a guinea pig in a box with a lever in it. Every time the guinea pig pressed the lever, a food pellet fell out. The number of times the guinea pig pressed the lever in a day gradually increased. This behavior modification through a reward system is called operant conditioning. People also give in to rewards. This principle has been applied in various fields of education, human resources management, marketing, etc. and achieved good results.
UBI embeds this principle in its incentive-based model to encourage people to drive safely. This model not only saves money for the insurer and the insured, but also promotes better driving quality – a win for everyone involved.
challenges
There are some concerns that need to be addressed. Privacy issues are at the top of the list as people fear revealing details about their whereabouts. The other concern is to regulate the way data is collected so that customers can transfer their data to another insurer and receive services without having to start from scratch.
UBI is still in its infancy and therefore these concerns will be addressed over time. However, these challenges outweigh the benefits that UBI has to offer.
These are the competitive advantages of UBI that can make UBI a mass market offering. It is important to educate the masses on how UBI can transform car insurance into a profitable and socially responsible system for all parties. Insurers can use this tool not only to offer insurance solutions but also for marketing purposes through consumer engagement features. Policyholders pay as they drive, which can result in better driving.
Usage-based insurance is a versatile system to reduce costs, retain customers and inspire responsible driving. The end result of UBI will be the satisfaction of insurance providers, their respective customers and society at large
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