Usage-based insurance (UBI) is increasingly gaining traction in the automotive industry, and its evolution is allowing many insurance companies to appeal to drivers, including those of a young age, with the offering of a telematics-based insurance that monitors their driving patterns and could save them money .
Usage-based insurance – also known as pay as you drive (PAYD) and pay how you drive (PHYD) – and mile-based automotive insurance is a type car insurance whereby the cost is dependent upon the type of vehicle used, measured against time, distance, behaviour and place.
In a recent Automotive Megatrends webinar, which focused on the evolution of insurance telematics in key markets such as Europe and North America, Frost & Sullivan’s Sathya Kabirdas, Research Manager, and Niranjan Manohar, Programme Manager, both discussed how the UBI ecosystem is evolving and what this means for the industry and its consumers.
Kabirdas discussed UBI from a European market perspective, addressing the level of adoption of different forms of UBI. He explained how the market has advanced since early 2000 from tracking systems in premium cars right the way through to the present, where many different types of UBI insurance exists, such as embedded black box, OBD II-based telematics, and tethered smartphone-based solutions.
Kabirdas also explained that UBI is now gaining further traction in the market and is being pushed in a big way. Although the industry began UBI solutions with mileage-based solutions, now different forms of UBI are starting to exist.
He said, “In early 2000 insurance companies started to emphasise the insulation of telematics space and tracking system in premium cars. 2007 saw the first commercial launch of PAYD insurance. 2008 was the year that UBI saw heavier adoption in the industry and in 2010 companies such as Qualcomm introduced its PAYD solution, along with Renault which introduced something similar for fleets.”
PAYD is a form of UBI that examines how a driver performs and bases insurance premiums on its findings. This type of technology is currently gaining traction both in North America and Europe, and trials have been increasing and even doubling, with 75% of UBI launches now based on this solution.
Kabirdas also looked into the future of UBI solutions, however, and concluded that 2015 onwards will see Manage How You Drive UBI solutions gaining traction, not only monitoring the driver but providing him with detailed feedback on his driving patterns. He said, “It will slowly gain presence in the market beyond 2015, letting the driver know how well he is driving and studying his driver behaviour. This will also be available as a smartphone type of app or solution, and will exist as a fun app allowing drivers to find out how safe they are behind the wheel.”
Manohar spoke regarding the evolution of UBI in North America, which is now a mainstream offering by more than 60% of insurers in the US.
He observed that there is a two-tiered discount structure for insurance in North America at the moment, and similarly to Europe, the first level is based on mileage and the second on an analysis of real-time driving behaviour.
Manohar explained his prediction that the UBI market in North America is expected to expand enormously in the coming years, with a compound annual growth of around 41.6% from 2013 to 2020. However, he noted that “UBI programmes depend largely on not only legislation changes and support of state regulators, but consumer driving behaviour improvement is key for market to gain growth.”
Built in versus brought in
Similar to driver infotainment telematics, there are many usage options for UBI telematics.
Kabirdas explained that the options consist of embedded, portable, and independent smartphone solutions. He said, “An embedded option would be hard wired into the car and would need to be professionally installed; a portable device would be one a consumer could bring into the car, but it would still need to be installed into the OBD II system in the dashboard. The third option would be an independent smartphone solution. This would be brought in each time the consumer entered the vehicle to drive.”
While each has its advantages and disadvantages, Kabirdas explained that the smartphone solution ultimately mitigates the capital expenditure and deployment headaches as it works independently and doesn’t require a box fitted in the vehicle.
Manohar noted that currently, like in Europe, both embedded and tethered solutions are available in the North American market, as companies are offering a mix of embedded, portable and tethered solutions. However, he suggested that soon, a wider range of management services will eventually propel the growth of OBD2 among companies as well as consumers.
He also said, “In future, the role of the smartphone as a device to monitor driving will gain prominence.”
Different markets, different needs
Kabirdas explained that most of the markets in the future will be led by embedded solutions with the impact of eCall. He said, “Germany is key on accuracy of data and professionally installed devices are preferred but premiums are low so smartphone installed devices may also be an option in the country.”
However, he pointed out that France is a different story, as privacy concerns are big. Kabirdas explained that the UK market has a willingness to pay for value added services and is open to smartphone UBI solution.
Throughout Europe, Kabirdas explained that currently, embedded systems are clearly dominating and will continue to do so. He said, “The demand for embedded solution OBD devices are less in Europe than in the US. This is largely due to the lack of standardisation of OBD ports unlike in North America.”
Kabirdas also explained that smartphone solutions are likely to gain market acceptance by complementing the telematics box and offering a standalone solution. Kabirdas noted, “Next generation phone apps will be 95% accurate – this will instil confidence in the consumer as well as insurance companies that the devices will be reliable.”
Kabirdas explained, however, that a higher risk driver will call for more professional and reliable solutions, and he noted that a black box is the most reliable solution in this instance. He said, “If a driver is lower risk, they will have less need for expensive solutions, so a hardwired box is best suited to high risk drivers while smartphone apps and OBD solutions are likely suited for low risk and cost sensitive drivers.”
Kabirdas pointed out that risk factors are much higher for young drivers than older and middle-aged drivers, who ultimately are more experienced. He said, “Middle aged people account for the least amount of accidents, and drivers aged from 20-24 account for the highest.”
In the North American market, Manohar suggested that apart from the current domination of PAYD, PHYD is likely to be the preferred type of metrics to calculate premiums, while MHYD slowly gains momentum.
But the sales of UBI devices, and ultimately their success in the market, is reliant on the levels of acceptance by consumers. Manohar said, “The UBI sales in 2017 will take off as privacy concerns resolve over time due to the increased number of customers willing to share data, and with costs of data and hardware decreasing and customer acceptance increasing, UBI will continue growing.”
Kabirdas explained, “Privacy concerns have been the major concerns but when you look at the potential value added services requiring the exchange of information like vehicle management and customer relations management, what do you think the consumer will choose? If they can save a lot of money by sharing some data, it seems like a viable option.