Why do Insurers need Try-Before-You-Buy Usage-Based Insurance?

Sep 6, 2018 5:00:32 PM

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When launching a Usage-Based-Insurance (UBI) solution, it's essential to Try-Before-You-Buy, not only to make sure that it fits your needs as an insurer, but also that of your customers.

Before we start, let's quickly define a few things to make sure we're all on the same page.

Usage-based insurance differs from traditional insurance: costs vary based on how safe drivers are  (Pay-How-You-Drive) or by the distance they travel (Pay-As-You-Drive).

Pay-As-You-Drive (PAYD) is vehicle insurance based on distance  driven, while Pay-How-You-Drive (PHYD) is based on how safe of a driver you are. With PHYD drivers will receive a discount of up to 25% off their (set) premium based on how safe they drive. Baseline gives insurers the ability to offer UBI with products such as Drivn and Behaev. Baseline's solutions use telematics data to generate a driver's driving behavior and convert it into something standard and easily understood: their safety score. The safety score is used to calculate the risk of being covered (as subsequent premiums).

Try-Before-You-Buy offers a buffer when switching to this new way of doing things. Before committing to something, whether it be car insurance, hiring, or buying shoes - we all want  a chance to test the waters, to make sure it's compatible with what we're looking for. We all want to reduce risk wherever we can, and Try-Before-You-Buy gives us the chance to do exactly that,  so that there is no hesitation for potential customer to sign up, and maybe even make a purchase.

An Insurer's POV

For an insurer who considers offering usage-based insurance to their clients, there's a great many hurdles for them to get over, especially if they have little knowledge of creating a UBI program.

Newcomers to building a UBI program need to:

  1. Learn how to use telematics data properly to generate data they can use for their UBI,
  2. Learn how to evaluate the driver's behavior and risk from the telematics data they've gathered.
  3. Learn how to properly price their premiums based on the data they've collected.

For most insurers, the thought of using a driver's data directly in calculating their pricing algorithm is scary. On the other hand, having to do the same thing again and again for all their clients who desire usage-based insurance, that is the stuff of nightmares.

It's critical for proper UBI to have enriched telematics data filtered from any unwanted GPS noise and cleaned. This data can be further enriched by adding layer after layer of information from each trip. Information such as local speed limits, road types and average traffic can help add context and further meaning to any data collected. Insurers must be able to generate the actual risks of covering someone on the road or, at the very least, devise a model that leads to more accurate calculations than before. If not, everything collapses. This lack of knowledge of what they need to know is what makes insurers so reluctant to carry usage-based insurance.

For insurers willing to try developing a UBI program for their clients for the first time, there are still attractive options.

Some insurers choose to work with a telematics service provider (TSP) who has extensive knowledge concerning UBI and scoring. This gives them a shortcut to developing a program that can be brought to market fast, all the while respecting the practices that will make it a success or, at least, an indispensable learning experience. . The problem? Doing it this way tends to be really expensive.

Another method that works very well and is considerably cheaper is using a Try-Before-You-Buy approach. With Baseline, all a driver has to do is download an app on their  mobile device and all your have to do as an insurer is choose one of our integrated usage-based insurance solutions to start receiving that driver’s data. The app gathers driving data via GPS & gyro sensors on the mobile phone. If they go through the process, they’ll get the chance of getting usage-based insurance and possibly saving up to 25% less, depending on how safe they drive.

There is a catch, however.

To generate the data needed, drivers have to complete 200 miles over at least 10 trips. Driving data is transmitted to a central hub where it's transformed into information that can be used to determine  driving behavior, speed, distance traveled, braking, cornering or distracted driving. From this information, our safety score is generated, indicating how safe a driver actually is. With that information, insurers can figure out how to calculate the actual risk of covering a driver. This gives insurers the option of offering usage-based insurance to participating clients.

For insurers, the purpose of having a Try-Before-You-Buy approach allows them to collect current and relevant telematics data for free. They're able to gather sufficient data to understand driving scenarios and risks before they have to pay out any claims. While their clients test drive the app, they're able to test drive the process of having usage based insurance for their clients. If insurers lack experience in handling telematics, it's an effective market entry strategy. Insurers need to find a way to understand the risks of offering usage-based insurance before the insurance policy even begins, which is exactly what Truy-Before-You-Buy offers.

By participating, end users receive insights on their own driving and are given suggestions on how they can improve their driving behavior and become safer, better drivers. Participating drivers become more comfortable sharing their location with 3rd parties because they receive something in exchange for it; in the short-term they receive information about their driving behavior, and in the long-term they have the chance of getting cheaper insurance premiums in return for driving safely.

In the process of tackling a Try-Before-You-Buy approach, participating drivers are able to get better insight into their driving using a cool app on their phones as well as the possibility of getting discounts on their insurance. They no longer have to be satisfied with a one-size-fits-all  insurance. They get a feel for the plan before they commit, because they've been immersed in it through testing.

By participating, insurers have the chance to build  relevant and timely data they can use to more accurately calculate risks, for relatively low cost. They're able to develop usage-based insurance products for their prospective clients. In a way, you get to "test-drive" potential customers, see who represents a good risk and who does not. By using the information you have - you can go after the best risks, forget the others, dump the rest. Leave the high-risk clients for your competition to lose money on.

The reason that Try-Before-You-Buy works, is that everybody gets to try things out without committing. There's no risk in trying.  Along the way, there's the possibility of usage-based insurance. It's win-win when Try-Before-You-Buy is involved.




Rob Postuma

Written by Rob Postuma

The one thing I've learned in life, is that your goal in life should be to be happy. Anything else is secondary at best. Weirdly, I find myself happy working in the insurance industry, go figure.

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