Usage-based pricing is a fascinating topic for insurers. A technology that allows persistent monitoring of risk exposure during the coverage period could potentially enable insurers to price each risk at the most adequate rate.
Executive SummaryGlobal insurance telematics best practices have generated more value through claim cost reduction, changes in driver behavior and a self-selection effect than through pricing, Director Matteo Carbone and Casualty Actuary Josh Taub report, basing the conclusion on the experience of the IoT Insurance Observatory. Noting that a CAS survey finding that a key reason for customer reluctance about usage-based insurance is the absence of a single stable price, the authors review telematics-based insurance approaches that have been more successful than UBI globally.
The potential, however, is not the reality.
In 2017, 14 million policies sent telematics data to insurers around the world, of which 4.4 million were in the U.S. market, based on an estimate by the IoT Insurance Observatory, an insurance think tank that has aggregated almost 50 insurers, reinsurers and tech players between North America and Europe. (In the U.S., there were another 3.6 million policies still active and commonly defined as telematics but which in the past had a dongle only and didn’t send any data to insurers last year.) However, less than 9 percent of the global insurance telematics policies were characterized by usage-based pricing, which is a mechanism that charges the policyholders for the current period of coverage based on how they behave (mileage and/or driving behavior) during this period.