For P&C personal and commercial lines carriers, telematics-powered Usage-Based Insurance (UBI) is becoming more of a competitive differentiator than ever, with more than 20 filed UBI products in four states and at least 10 in almost every state, according to Willis Towers Watson. Yet, obviously, not every property and casualty insurer offers UBI as part of their current product set.
With the pace of innovative change taking place in the industry as well as the growing throng of incoming competitive disruptors entering the auto insurance space, however, the decision to offer UBI products is no longer a question of “if” but “when.” Why? While there are many factors informing insurers’ decisions around UBI, one of the most critical is the notion of adverse selection.
Think about it: as more and more good drivers choose the premium discounts offered by UBI insurers, traditional insurers are faced with actuarial, underwriting and claims-related challenges associated with the leftover pool of drivers – those considered high-risk.
We’ve come a long way from establishing risk classifications based only on observable physical characteristics of the vehicle, driver and his/her driving and claims history, however, the fact remains that from an actuarial perspective adverse selection becomes a losing proposition as the formulas for risk classifications are challenged by a shrinking number of good drivers in the risk pool.
Insurers that do not participate in UBI programs do so for a variety of reasons:
Late-comers to the UBI marketplace or those that don’t offer UBI may already be experiencing the effects of adverse selection, struggling to compete for the safest drivers and policyholders. The problem is they may not know it.
Consider that a few years ago insurers were in a fierce battle for customers by offering lower rates, an economic plan that was clearly not sustainable. Today, thanks to a long period of low interest rates affecting investment returns as well as the costs related to an increase in both the severity and frequency of auto claims, premiums for auto insurance are on the rise, albeit less so for UBI insurers.
Traditional insurers that continue to evaluate their ability to compete based on economic indicators such as those listed above may be missing the obvious, because 1) the proper assessment of the risk associated with each type of policy enables the insurer to adjust policy pricing accordingly; 2) effective evaluation of cost per claim (of which there will be more frequency and severity with high-risk drivers) ultimately affects revenue per policyholder.
Perhaps Robin Harbage, director at Willis Towers Watson, said it best: “Doing nothing is not an option.”
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