It’s common knowledge that the auto insurance industry is experiencing its share of challenges right now related to combined loss ratios. In fact, since 2012 auto insurance rates have increased in all states–and for all drivers–even those with flawless driving records. We all know that this approach to selling auto insurance doesn’t lend itself to increased customer satisfaction.
Although the industry as a whole has backed routine rate increases, only Progressive and GEICO (two of the top five carriers) have hung on to maintain steady profits. Yet those profits have seen a downward slide over the past seven years, notes Forbes contributor Craig Casazza. One primary source for this struggle is with the cost of claims.
GEICO, Allstate and State Farm have reported increasing their rates to cover the rising cost of claims. Against the severity of car accidents trending upwards since 2011, Casazza points to Progressive, which reports that their cost per claim rose by 5 percent from the first nine months of 2016 compared with the same period in 2015. State Farm’s revenue has increased 26% since 2010, yet has seen a 35% increase in claims cost in that same time period, and has stated publicly that a chief contributor is the rising expenses related to repairing vehicles that include sensors as standard.
As a result of these challenges, it’s no wonder that many insurers are considering ways to differentiate themselves by entering new markets with new products, such as Usage-based Insurance (UBI). Never a simple undertaking, players such as Progressive and Allstate have proven that UBI programming has short- and long-term benefits.
However, insurers starting fresh, without that book of business in force (and resultant driving behavior data), will likely encounter layers of decision making as to which UBI approach is best. Why? Because although no two UBI programs are exactly alike, they do have a common denominator: The ability to collect the right data for application to the right risk.
As a result, decisions around UBI programming are not made in a vacuum; rather, they usually are made in the Boardroom—with stakeholders listening to all sides of the investment argument. With the stakes this high, designing a UBI program that achieves positive ROI requires extensive due diligence around reducing costs.
The bottom line is that their requisite effort entails a review of UBI program potential against cost reductions in other functional business areas, such as underwriting and claims. For risk assessment and underwriting, the clear concern is adverse selection–how can we monitor to make sure we are insuring the right risk?
From a claims perspective, it’s a much bigger picture, typically tied to the obvious metrics around frequency and severity-but like peeling back the onion, it’s hard to predict loss against a program yet to be implemented. Or is it?
Applied correctly, the data collected relative to a UBI program can provide a lot more than real-time notification of accidents, or enhanced data related to physical damage, road conditions, etc. It can provide data related to specific, unique driver behavior that can be vetted and analyzed for incorporation into the larger risk profile, as well as for policyholder feedback and remediation.
This plays forward to an even more compelling case for UBI that’s tied to proactive claims management–loss prevention. Here, there is some historical data from which carriers can draw conclusions and even make assumptions: The National Safety Council reports that 2016 saw more auto vehicle-related deaths (40,000) than in the past decade. In the year prior, 10 percent of fatal crashes, 15 percent of personal injury crashes and 14 percent of all police-reported motor vehicle traffic crashes were tied to labeled “distraction-affected” crashes, says the National Highway Traffic Safety Administration.
As we close out the month of May, which has been designated by the National Safety Council as “Distracted Driving Month,” this information, along with the fact that upwards of three-quarters of Americans now own a smartphone, says a lot about the opportunities insurers have to reduce frequency and severity using telematics and best practice UBI programming. In other words, UBI programs that are designed to insure the right risk, and ensure a reduction in loss frequency and severity, hold the key to a reduction in claims costs, and, thanks to value-added UBI features such as actual driving behavior data, an increase in customer satisfaction.
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December 1, 2020