The idea of paying for a product as you use it isn’t new, but it is for certain industries. Publishers, for example, have been selling newspapers and magazines through subscriptions for decades, but the model is becoming more familiar elsewhere as well, such as over-the-top video content, office space usage and even fashion. And with advances in technology, usage-based insurance (UBI) is quickly gaining traction as well, particularly among younger drivers.
Customer acceptance is a big hurdle for UBI carriers, primarily because of concerns about privacy, car malfunctions and the accuracy of driving reports. These concerns stem from the fact that UBI requires onboard telematics technology that transmits driving habit information from vehicle to insurance carrier. Even so, given the rapid growth in connected tech, U.S. household participation in UBI policies is on the rise, growing from 13% in 2013 to 20% in 2015.
As with many modern tech advancements, Millennials (born 1977-1995) have been quicker to adopt UBI than their older counterparts. In fact, Nielsen’s 2015 Insurance Track survey found that Millennials are 44% more likely than the average consumer to use a device from their insurance company to track driving behavior in exchange for discounts. What’s more, upscale Millennials—those whose income is greater than $75,000—are 79% more likely to use these programs.
So what’s in it for the consumer? Policies that are more reflective of true driving behavior, and that means potential cost savings. Notably, consumers who take part are given an accumulating discount at renewal, which normally ranges between 5% and 30% of their premium. What’s more, drivers can often track their discount online or via mobile app.
Carriers typically calculate the discount based on:
By collecting this information, insurance carriers are able to analyze real time data compared to predictive risk modeling from actuaries based on number of statistics. This allows companies to develop new products and increases auto premium pricing accuracy.
By 2020, 90% of new cars will have on-board telematics technology. That will clearly defray many of the manufacturing cost issues that have been a profitability hurdle for many carriers to date. New partnerships with telecom providers will also advance telematics to include additional functionality, such as geo-location, vehicle diagnostics, roadside assistance and parental controls for young drivers—all of which may help insurers price their policies more accurately, as well as more cost efficiently.
For additional insight, download the Usage-Based Insurance and Telematics report.