How can insurers increase motor insurance penetration through usage-based insurance?

Car owners in the current state of the market have a choice between buying the simple third-party insurance or a comprehensive insurance that specifically covers physical damage to the vehicle, usually with a significant number of exclusions. In short, individuals don’t have a choice other than going with the traditional means of insuring a vehicle.

Insurers, on the other hand, have the freedom to determine prices. However, insurers have been happy to follow the tariff and compete with each other on various types of price discounts and extra coverage. The premium fixation in the market adopts the ‘one-size- fits-all’ approach, which may not consider the realities of the market as a favourable one.

There has also been a debate on why the government has not deregulated the third party element of the cover, as it has already done with the ‘own damage’ element.

It’s likely that deregulation would raise innovation in the market and there is still a long way to go with evolution of products and technology in the motor sector.

General Insurance Council (GIC) figures show that only 83 million out of 190 million registered vehicles in India invested in the third party insurance cover in 2015-16. Figures from GIC’s yearbook show the extent to which non-life insurers are struggling to generate operating profits, and the need to move away from an ‘asset-driven’ approach to a more ‘risk-driven’ approach.

The net incurred loss ratios tend to be high and policy pricing is currently standardised by groups of vehicle types. The benefit of no-claims in a year is passed on in the form of a fixed discount on the premium at renewal.

Insurance plans that offer zero deduction for depreciation, and inclusion of certain auto parts (which are normally excluded), are yet to find wider acceptance. Only a handful of policyholders understand terms such as zero depreciation cover, engine coverage (including water damage caused by extreme weather or other consequential loss), spare key coverage, personal accident cover, ambulance and medical expenses cover, vehicle replacement cover or rental reimbursement.

Most insurers are still in the process of educating consumers about these types of add-on coverage. For insurance companies what matters most is efficient risk pricing, not just growth from innovative product features.

Motor insurance forms about 45 percent of the total business of non-life insurers in India. The incurred claims ratio in motor insurance – defined as the ratio of paid claims to premiums collected–was at a high of 77 percent in financial year 2015. Clearly such a high ratio represents a major cost for the industry, leaving the market ripe for new technological advancements that lead to more accurate pricing of risk.

Whilst we see new motor cover options struggling to attract interest from consumers, there are some much more exciting developments coming in the next few years.

Telematics technology that enables usage-based insurance pricing is catching on in several countries notably the US, Australia, Italy, the UK and other parts of Europe, and its take up rate is accelerating.

Telematics – working through the vehicle’s GPS and cellular connection – allows insurance companies to monitor a driver’s behaviour on a real-time basis and bring the premium in line with the behaviour of the driver.

One major forecast has estimated the number of consumers opting for UBI will grow to 100 million globally by 2020, reaching 50 percent of all vehicles on the roads by 2030. According to a 2016 survey by Ptolemus Consulting Group, India will be among the countries where UBI will be launched in personal motor insurance by 2020.

With usage-based insurance, in-vehicle telecommunication devices (either an installed black box, smartphone app, OBD dongle or embedded telematics) are installed to gather real-time data. The behaviour of the driver – such as kilometres driven, GPS location data, any rapid acceleration, hard braking and at what time of the day a vehicle is driven – all relevant information to insurers is captured real-time. The data is analysed and risk scores are determined based on the analytics results.

In a survey last year among US consumers, we found almost 50 percent of drivers in the survey had sought a Usage-Based Insurance policy, but only one in five of them were actually given the option of this type of cover. This suggests a huge opportunity for insurers willing to take the leap and embrace telematics-based motor insurance.

Additional benefits to the policyholder from Usage-Based Insurance policy can include:

--Monitoring of driving style can coach the driver, delivering incentives (points or policy discounts), reducing the number of accidents

--Supplying crash diagnostics and triggering emergency assistance in the event of an accident

--Lower premiums (especially for younger drivers or other riskier drivers)

--Driver identification for multi-driver vehicles

--Stolen vehicles tracked and recovered

--Car fleets can determine the most efficient routes and cut speeding fines

--Driver alerts and partnerships with other vendors for saving costs on fuel and maintenance.

Insurance can also use telematics in the form of a useful research tool to measure large volumes of real-life, natural driving behaviour and the effectiveness of safety interventions respectively.

Training and guidance on the data can help highway authorities identify problem locations on the road network.

Usage-based insurance can also enable insurers to offer more personalised pricing. On comparing the correlation between UBI driving score and loss ratios derived from traditionally-priced policies.

The drivers with lowest UBI driving score had a loss ratio of approximately 135 percent, compared to a loss ratio of approximately 38 percent for the top scorers. Further preliminary research showed these insights to be valid and applicable in the US consumer market—and with modifications, in other countries.