Auto insurance companies collaborate with system suppliers and telematics service providers to offer usage-based insurance (UBI) which is also referred as 'pay as you drive' (PAYD) insurance. This growing telematics service is already being offered in California after new regulations were passed recently. UBI takes into account the various parameters such as miles driven, time of the day driven, driver's acceleration and braking patterns by the insured within a particular time frame.
Analysis from Frost & Sullivan (automotive.frost.com), Strategic Analysis of North American Market for Telematics-enabled Usage-based Insurance, finds that the market had 1,37, 000 UBI activations in 2010 and estimates this to reach 1.1 million UBI activations by 2017.
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While drivers clocking high-mileage end up paying a higher premium than the charges in conventional insurance models, those with fewer miles and in the low-income groups will benefit from the value-added telematics-based services that can be made available on a single platform. Yet, customers are apprehensive about switching to UBI due to privacy infringement issues.
"Tracking one's daily movements for a savings of 30 percent on the premium cannot find favor with customers, who regard privacy as extremely important," observes Frost & Sullivan Senior Research Analyst Niranjan Manohar. "Insurance companies face a potential restraint as the system's basic principle is to keep track of its customers through a global positioning system (GPS)."
The new regulations in California have banned the use of location data for most purposes. However, they also clarify that insurers and motor clubs are not prohibited from offering optional devices to drivers, as they will help identify the location of the vehicle for providing emergency road, theft, map, or travel assistance services and could be used by State Governments to access all accident data.
The current market is controlled and driven by insurance companies that lease services to a telematics service provider (TSP), who, in turn, act as the solutions provider to the insured on a contractual basis. Instead of managing the complex value chain with individual suppliers, the insurance companies should collaborate with end-to-end telematics providers. Telematics providers can provide service and data to different participants in the value chain. Telematics solutions can be leased rather than sold, as the insured is not likely to bear the costs of the same.
Another possible reason for the slow uptake of UBI is the lack of customized solutions that offer bundled services, as insurance companies depend on the introduction and growth of bundled telematics-based solutions. In order to increase the activation rates of UBI, insurers must form partnerships with system suppliers who develop an open telematics platform, enabling multiple services in a single solution.
Government authorities can implement legislations mandating the provision of additional telematics services along with UBI, which could alter the current scenario by changing consumer perception and acceptance. This move would provide the information and customer feedback necessary for select UBI models.
"Creating value for users can help customize and deliver a unique, compelling, and defendable service proposition," says Manohar. "Offering customized tariff options for different customer segments based on an effective risk analysis can assist mass market introduction of UBI."
Insurance companies should also increase focus on the commercial vehicle market. Driver training and risk management holds the key for fleet companies, where cost cutting through reduced premium is expected to improve their revenue potential.
Strategic Analysis of North American Market for Telematics-enabled Usage-based Insurance is part of the Automotive & Transportation Growth Partnership Services program, which also includes research in the following market: Strategic Analysis of European Market for Telematics-Enabled Usage Based Insurance. All research services included in subscriptions provide detailed market opportunities and industry trends that have been evaluated following extensive interviews with market participants.
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Strategic Analysis of European Market for Telematics-Enabled Usage Based Insurance / N7A9