The case for Usage based Insurance
In an insurance policy, the customer is protected from a certain risk by the insurer / insuring company, in exchange for a price, the insurance premium. For an insurance policy to be attractive to the customer, the customer should perceive value in the protection being offered by the insurer. Simply put, the perceived value of the protection being offered should ideally match the premium being paid by the customer.
However, insurance is not a commodity and hence, the value that the customer seeks from the product and the cost that they are willing to pay for it, differs from person to person. For starters, there is a latent need for personalized insurance products to fit the need of the customers. In the long-term, Insurance products need to be tailored to fit individual customer’s needs to the extent that they should be able to cater to a market of one. (Manchester, 2020)
The problem arises as each customer carries a different risk and existing models cannot accurately assess the risk associated with each individual customer. Another hurdle towards achieving this goal is the complexity of tailoring insurance policies for the needs of each individual customer. Hence, traditional insurance policies have always resorted to classifying customers into broad categories / bands based on the estimated risk that is associated with them, estimated by the demographic data of the customer.
The disadvantage of the traditional insurance model is that it does not cater to the needs of the customer at an individual level. Hence, there are always bound to be customers who are on the losing side and / or are dissatisfied with the service; and customers who benefit disproportionately, thus generating a loss for the insuring company. In the traditional model, insurance is sold like that of a commodity.
Enter, Usage-based insurance. The idea behind usage-based insurance is that customers sign up for an insurance policy, where they agree for their personal data linked to the insurance policy to be captured and analyzed in real time. The system charges insurance premiums to customers, based on their specific behavior / usage patterns. The safer the user behavior, the lesser is the risk associated with the user and hence, the lesser the premium that needs to be paid for that duration, thus incentivizing the customers, who actively embrace safety in their actions. The opposite also holds true for usage-based insurance policies, where user behavior that is associated with high risk are disincentivized with higher premiums.
Usage-based Insurance finds application in a variety of fields where there is a possibility and a necessity for collecting and analyzing customer’s behavioral data. Some of the major industries that are ideal candidates for the implementation of usage-based insurance are — the Health Insurance Industry and the Auto Insurance Industry. The latter is already seeing various developments in this regard, with players testing a slew of solutions such as telematics.
Both these industries rely heavily on individual customer data throughout their entire value chains — in predicting and analyzing risk, calculating and collecting premiums, and all the way till assessing and settling of claims. The availability of such data that is reliable and can be accessed with ease has the potential to disrupt these industries.
Benefits of Usage based Insurance
§ Mass Personalization of Insurance Policies — Tracking behavioral pattern of customers at an individual level can enable insurers to design and tailor personalized insurance policies for a market of one customer, thus maximizing the customer surplus for the insurer.
§ Better pricing of Premiums — Better and accurate assessment of risk associated with the customer based on data generated out of the customer’s behavior will enable insurers to price premiums, accordingly, matching the customer’s willingness to pay.
§ Faster processing of Claims — The data being collected using the various touch points of usage-based insurance will act as the authentic source of information for insurance settlements thus negating the need for assessments and long drawn documentation / verification processes. For example, telematics systems used in automobiles are generally used as the black box of information for the settlement of auto insurance claims, and have proven to reduce the times for processing of claims by up to 50% (Octo Telematics, n.d.).
§ Higher Customer Satisfaction — Tailor-made insurance policies that cater to the individual needs of the customer will result in higher customer satisfaction and bolster customer retention rates.
§ Risk Minimization — Since the premiums being paid in usage-based insurance are directly linked to the customer’s behavior over the period of coverage, it incentivizes customers to embrace safety in their actions and behavior. This reduces the overall risk for the insurer at a large scale and proves to be a win-win situation for the insurer and the customer.
All these benefits translate to increased revenue realization, lesser risk and strengthened brand equity for the insurer.
Usage-based Insurance charges insurance premiums to customers, based on their specific behavior / usage patterns. The safer the user behavior,… the lesser the premium that needs to be paid
A Success Case: Progressive Insurance
Based out of the United States, Progressive Insurance was one of the first auto insurance providers that experimented with usage-based insurance in the market. Their first usage-based insurance product, ‘TripSense’, was released as a pilot in 2004, followed by their service, ‘MyRate’, which provided customers with varying premium rates based on their driving patterns. (Progressive, n.d.)
Their current offering, named ‘Snapshot’, is a usage-based Insurance service that tracks the user’s driving patterns and rewards them with lower premiums for driving safely. Progressive Insurance offers a plug-in device that can connect to the car’s computer and / or a smartphone application that can be used to monitor the customer’s driving patterns. It also provides feedback to its customers, based on their driving data, to help them change their driving patterns and drive more safely. Progressive claims that customers using ‘Snapshot’ save $ 145 on average over the period of the program. (Progressive, n.d.)
Over the years, Progressive has continuously refined its product, increasing its reach and adoption in the market, and has established itself as an industry leader in Usage-based Insurance services. Progressive’s innovation and customer reach have helped them build a solid customer base and stand out amongst its competition, building a strong brand equity in the process.
Though Progressive’s offerings do not fully demonstrate the extensive set of features and benefits of usage-based insurance as discussed here, as it is limited in the amount of data that is collected, it certainly demonstrates the feasibility of implementing usage-based insurance at scale and the possibilities of its extension.
Implementation Roadblocks
Usage-based insurance models are solely dependent on the customer’s behavioral data to analyze and price premiums. Thus, any hurdle that prevents the collection of the relevant data needed for analysis, will prove to be a major roadblock for the implementation of usage-based insurance services at large.
The following are some of the possible hurdles that might hamper the process of data collection and thus impact the implementation of usage-based insurance,
§ Infrastructure requirements — The implementation of usage-based insurance entirely relies on the ability to collect, record and analyze customer data in real-time. There is a heavy dependency on the supporting infrastructure such as –Network availability, Big Data Capabilities, Internet of Things and Cloud Computing. Setting up / Building the entire infrastructure is bound to be capital intensive and long drawn, hence, limiting the implementation of usage-based insurance products across geographies and at scale.
§ Installation Costs — On subscribing to a usage-based insurance policy, the user is required to comply with the various data collection protocols set by the insurer that may require the installation of data collecting equipment depending on the customer’s position and the type of policy. This will drive up initial costs that needs to be borne either by the customer or the insurer. This might also hinder the adoption of usage-based insurance products initially, though there is a possibility of reduced costs of premiums in the future.
§ Customer concerns — Though usage-based insurance products offer a slew of benefits for the customer, possible concerns over the integrity and security of data being collected and reluctance amongst customers to share personal data will limit the implementation / adoption of usage-based insurance products at a large scale. Another issue is the lack of customer awareness of the benefits offered by usage-based insurance schemes, which prevents them from shifting to such schemes from their existing insurance policies.
§ Policy restrictions — The insurance space is subject to strict regulations and compliance standards to ensure fairness and security. Hence there is a need for establishing business models with detailed procedures, checks and balances for regulatory approval and market entry. This limits the speed of implementation of innovative and new insurance products such as usage-based insurance and might also hinder players in the insurance industry to experiment with such products in the near future.
The Case of the Indian Market
An analysis of the Indian Auto Insurance market gives us insights on the several roadblocks to the adoption of usage-based insurance services in the market. The Indian Auto Insurance market is filled with commodity-like insurance products that provide a similar set of coverage and benefits for the customers, typically around the same price range. Lack of customer awareness around the different insurance products has enabled these commodity-like insurance products to thrive in the market, further disincentivizing insurance providers to experiment and innovate. (Shankar, n.d.)
As a result, Indian Auto Insurers have been late to adopt innovative ideas such as telematics-based insurance solutions, with the first pilots being rolled out in 2020 (Shankar, n.d.). Additionally, the initial cost associated with implementing telematics and launching usage-based insurance services on a wide scale, while the Auto insurance Industry is already faced with burdened financials has made players in the industry to venture more cautiously into this segment.
Auto Insurers in India have their work cut out, to incentivize and lure customers to their new usage-based insurance services. Apart from investing in the required infrastructure and equipment for telematics and usage-based insurance services, Auto Insurers also need to focus on increasing customer awareness by demonstrating value for the customer and increase adoption of their new services to bring about a change in the market.
Summary
With the wide-spread availability of pervasive digital technologies such as IoT, smart devices that can help track and monitor user behavior and the development of network infrastructure that can support such technologies in real-time, Usage-based insurance is poised to take over the market in the supported areas.
Usage-based Insurance holds massive potential to disrupt and overturn the insurance industry, providing value for both the customer and the insurers alike. However, there is an imminent need to overcome the many different roadblocks and the lack readiness in the market to ensure that usage-based insurance products are implemented and adopted successfully.
References
1. Manchester, P. (2020, February 28). Why the insurance industry needs to rethink its value proposition. Retrieved from EY: https://www.ey.com/en_gl/innovation-in-insurance/why-the-insurance-industry-needs-to-rethink-its-value-proposition
2. Octo Telematics. (n.d.). The Case for Telematics in Auto Insurance Claims. Retrieved from Octo Telematics: https://www.octotelematics.com/blog/the-case-for-telematics-in-auto-insurance-claims/
3. Progressive. (n.d.). Progressive Firsts. Retrieved from https://web.archive.org/web/20160506161940/https://www.progressive.com/progressive-insurance/first/
4. Progressive. (n.d.). Snapshot FAQ. Retrieved from Progressive: https://www.progressive.com/auto/discounts/snapshot/snapshot-faq/
5. Shankar, S. (n.d.). Is it Time for Usage-Based Insurance for Vehicles in Indian Market? A Critical Analysis. Retrieved from LexisNexis: https://blogs.lexisnexis.com/insurance-insights/2017/04/is-it-time-for-usage-based-insurance-for-vehicles-in-indian-market-a-critical-analysis/
