Do you sometimes exceed the speed limit when driving? Accelerate fast or brake hard perhaps? Beware – your insurance premiums are likely to go up!
Underwriting Basics
Insurance has always been based on a sharing of risk. Yes, insurers use underwriting to rate individual risks but in the high volume classes, most insurers still rely heavily on statistical averages; otherwise known as the law of large numbers.
Let’s take motor insurance for an example. Many insurers will base the risk on where you live, what type of car you drive, whether you use it for work or not and, of course, your past claims’ history. With one or two notable exceptions, such as YOUI, generally insurers don’t ask detailed information about how many kilometres you drive per year. Some policyholders will drive a lot and some won’t … to the insurer, it all averages out. But …
If we acknowledge that the vehicle is most likely to be involved in a claim whilst it is moving rather than parked, the person driving from the Gold Coast to Brisbane and back each day is a much higher risk than the person who leaves their car parked in a secure garage and catches the bus to work. At a macro level the averaging works fine for the insurer, but at a micro level the individual using public transport could be ‘subsidising’ the long distance driver.
Usage Based Insurance (UBI)
Acknowledging this concept, and marketing to those who travel less, insurers like Real Insurance are now offering UBI products where you estimate the number of kilometres you are going to drive in a year and they factor this into the underwriting risk calculation. If it looks like you are going to go over this limit you can notify them and ‘top-up’ by paying an additional premium.
The advent of Telematics has opened up the opportunity for insurers to collect real-time data relating to kilometres travelled and therefore to offer accurate UBI cover. Metromile is a usage based start-up insurer in the United States using a mobile app and a sensor attached to the vehicle’s OBD-II port. You pay a fixed base insurance rate per month plus a cents per mile calculation on the actual data recorded; so it is true usage based. This style of motor insurance is becoming known as ‘pay as you drive’ (PAYD).
However, telematics devices in vehicles have the ability to track far more than just the number of kilometres you travel. The data feed can include where you travel (by GPS), when (peak times or otherwise) and even ‘how’ your drive – logging speed against known limits and by using accelerometers to track excessive acceleration or braking. At that micro level, these are all relevant factors to an underwriter. This approach is already moving the PAYD concept to PHYD (Pay How You Drive).
Behaviour Based Insurance
Both Progressive Insurance and Allstate in the United States have PHYD products available. Allstate’s approach is one of charging a base premium then giving cash back rewards for safe driving, time of day, etc. QBE have released a product here in Australia called Insurance Box, which is a full PHYD product using telematics to generate a “DriveScore”. Put simply, the better/safer you’re driving, the higher your score, and the lower the premium you are charged.
Those travelling less distance, in less congested areas, outside of peak traffic hours and/or those driving more ‘safely’, are going to get cheaper premiums. However, these are the very drivers who are less likely to be having claims currently and are the people subsidising the rest. The undeniable consequence of this is that, for insurers to retain the same premium income, those more ‘risky’ drivers will have to pay more.
It isn’t just the motor sector that has decided that rating risk on real-time behaviour rather than ‘usage’ is the way forward. If you purchase John Hancock Life Insurance in the USA you can join their Vitality Program. Via a Fitbit activity tracker, the insurer will monitor your physical activity. By meeting targets that help you stay healthy you can earn rewards and savings. In Australia, MLC Life Insurance has a similar approach. By wearing a fitness tracker and achieving a target ‘wellness score’ (which includes not only activity, but sleep and resting heartbeat KPIs) you can generate discounts of up to 10% of your insurance premium.
The Future
The possibilities for the future with this type of technology are fascinating. Perhaps, when ‘embeddables’ and ‘ingestibles’ are as common as ‘wearables’ are today, a Life Insurer’s drone will deliver emergency medication as symptoms of a condition begin to register, or an automated call will be placed to paramedics in the very early stages of a heart attack.
The innovative players will continue to test new ideas but, in the meantime, perhaps we need to take a quick check on our driving habits in readiness.