Increased data and improved accuracy in risk-based pricing are some of the benefits that auto insurers seek when they adopt usage-based insurance programs, but an added benefit is increased retention of more satisfied customers, survey results reveal.

Executive Summary

Satisfaction and retention are significantly higher among auto insurance customers enrolled in UBI programs, especially those receiving discounts because of their participation. Discounts incentivize good drivers to participate, but what will happen when risky drivers’ rates are increased, asks J.D. Power’s Jessica McGregor, who details results of her firm’s 2015 U.S. Auto Insurance Study and Progressive’s recent move to adjust prices for risky driving behavior.

Customer satisfaction increases for good drivers who participate in UBI programs and receive discounts, according to results of the J.D. Power 2015 U.S. Auto Insurance Study. The survey found that the overall satisfaction level was 851 index points (on a 1,000-point scale) among drivers participating in a UBI program compared with just 811 among those who indicated a UBI program was not available. (Editor’s Note: The J.D. Power 2016 U.S. Auto Insurance Study was recently published as well. See related article, “Analyzing J.D. Power Ratings: How National, Regional Auto Insurers Stack Up.”

Additionally, UBI programs positively impact all areas of the customer experience. The greatest positive impact in the study was, not surprisingly, on price (+52 points)—particularly once participants began receiving discounts.

Program participation can also create greater engagement as customers become more aware of how their actual driving behavior affects the price they pay. As a result, satisfaction with policy offerings (+49 points) and billing and payment (+42) also increased.

UBI in Brief

Many insurers are either actively operating or piloting a variety of telematics underwriting models, often referred to as “usage-based insurance” or UBI.

UBI programs track real-time driving behaviors such as rapid acceleration, hard braking, locations driven, time of day driven, etc.

This information is used to more precisely assess risk and typically provides policy discounts for qualifying drivers.

Additional benefits commonly offered to low-risk drivers include theft monitoring, roadside assistance and vehicle alerts.

The study also found, however, that while 32 percent of customers indicated a UBI program was available to them through their insurer, only 8 percent were currently participating. Fully 21 percent of customers declined to participate in a UBI program when it was available, and 81 percent of these nonparticipating customers said it was because they did not want their driving monitored or felt they would not save money or that their premiums would actually increase.

Increasing participation in UBI programs may prove challenging if insurers move to driver penalty models similar to one that Progressive has adopted.

UBI leader Progressive announced in its 2014 annual report that a small number of drivers would receive rate increases based on data gathered through the insurer’s Snapshot program. This trend may impact the future of UBI. Because some drivers were already wary of sharing data regarding their driving behavior with insurers, this shift to applying UBI data to higher-risk drivers’ rates may be met with further resistance to participate.

But when drivers do participate, insurers that provide a highly satisfying customer experience benefit from higher rates of customer retention, reduced costs in acquiring new customers and more word-of-mouth referrals compared with insurers that deliver a less satisfying experience. The J.D. Power 2015 U.S. Auto Insurance Study showed that the likelihood to renew and recommend an insurer was 10 percentage points higher and 11 percentage points higher, respectively, among those participating in a UBI program compared with those without a UBI program available, and UBI program customers were less likely to shop for insurance within the next 12 months. Furthermore, UBI participants provided more positive recommendations and more often indicated that these recommendations resulted in a friend, relative or colleague purchasing from their insurer compared with those customers who did not use a UBI program.

Price is consistently one of the lowest-rated aspects of the customer experience across industries. For auto insurance customers, price is often completely out of their personal control. UBI programs give at least some of that control back to them.

As price becomes increasingly competitive in the personal auto insurance market, UBI programs have the potential to be more influential, even becoming a differentiator across a broader group of customers, especially as younger generations enter the automotive insurance market. Gen Z customers are most likely to use UBI programs (11 percent), as younger consumers are more willing to share their personal data and are less concerned with privacy than are older customers. (Source: 2016 J.D. Power Millennials Insight Report: The Customer Perspective. J.D. Power defines generational groups as Pre-Boomers, born before 1946; Boomers, born 1946-1964; Gen X, born 1965-1976; Gen Y, born 1977-1994; and Gen Z, born 1995-2004.)

This may prove especially critical to competitive success as the current soft market in the insurance industry continues.

The benefits associated with participation in a UBI program that customers most prefer are driver discounts, control of policy pricing, roadside assistance and vehicle tracking (theft recovery). Among customers without an available UBI program offering, 58 percent said they would participate in a program if it became available in the future.

Insurers with the highest percentages of UBI program participants in the 2015 study included Allstate (15 percent); State Farm (9 percent); Esurance (9 percent); and USAA, Farm Bureau Mutual and Progressive (8 percent each).

The J.D. Power U.S. Auto Insurance Study measures satisfaction on a 1,000-point scale. The study examines customer satisfaction in five factors (in order of importance): interaction, policy offerings, price, billing process and policy information (formerly billing and payment), and claims.

Satisfaction with UBI programs is highest among the 75 percent of customers who indicated they received a discount as a result of their participation. The study showed that overall satisfaction quickly eroded among the 25 percent of UBI customers who did not receive a discount even though they participated (-40 points). These customers were also less satisfied in all other areas measured in the study: policy offerings, price, billing and payment, interactions, and claims.

UBI programs are clearly improving the customer experience for those who feel they benefit from participation in the program, such as control of pricing when the result is policy discounts. These programs also help to educate customers and foster greater engagement with the product and the insurer. Participants have a stronger relationship with their insurer, indicating a higher likelihood to renew and recommend the brand, as well as a lower likelihood of shopping in the next 12 months.

Insurers are collecting billions of miles of real-time data that allows them much more robust analyses and more accurate behavior prediction modeling. Progressive, a UBI pioneer, has had a solid financial performance during the past several years for its private passenger auto line of business, boasting a strong three-year combined ratio of 95.9 and a three-year loss ratio of 75.1. The comparable results for the auto insurance industry were a three-year combined ratio of 102.9 and a three-year loss ratio of 78.2, suggesting that UBI may help to improve underwriting performance. (Source: SNL Financial 2012, 2013 and 2014 data combined for a three-year view and J.D. Power defined calculation of each ratio)

Telematics is one of many major disruptors to the property/casualty insurance industry in the United States. While the U.S. industry has struggled to implement telematics, it has become standard in other countries. There are clear monetary benefits to all insurers, while only a handful of customers ultimately realize a discount. New and increasing disruption in the P/C industry is becoming evident, including on-demand and pay-by-the-mile insurance. These additional disruptors provide consumers with a choice, and not all of them will be mutually beneficial, especially for traditional auto insurers.

As the industry moves to charging higher premiums to risky drivers based on data obtained from UBI programs, future program participation may be at risk. Insurers will need to balance the positives and negatives of the programs as they continue to drive both financial performance and the customer experience, while keeping in mind that soon customers will have other options to keep premium prices down through products such as mileage-based insurance.

Telematics is here to stay, and its reach has already begun to expand into the life and health industries. John Hancock is offering a 15 percent discount on life insurance policies when customers agree to wear a Fitbit and track exercise levels, and employers are offering incentives to their employees to wear Fitbits and monitor health measures such as blood pressure. (Press release: “John Hancock Introduces a Whole New Approach to Life Insurance in the U.S. That Rewards Customers for Healthy Living,” April 8, 2015.) Additionally, programs relating to smart-connected homes and hospitals are being piloted and researched, indicating future disruption in these markets.

Industrywide, insurers need to decide how to make use of telematics in their business—not whether or not to use it. For those not yet using telematics, the issue becomes how to incorporate the capability into their current operations. For those already using telematics, the issue becomes how to refine the use of the data collected to achieve their objectives.

Topics Trends USA Carriers Auto Market