Usage Based Insurance

Question 1

Define Telematics:

Answer 1

The use of wireless devices to transmit data in real time back to an organization. The data recorded in telematics devices can be used to develop more accurate pricing, improve the granularity of risk management techniques and reduce losses by enabling better claims assessments.

Question 2

List some factors that could impact premium in UBI programs:

Answer 2

• Location of vehicle
• Number of trips
• Mileage
• Driver behavior (how well they drive)

Question 3

Briefly describe the 2 categories of current loss cost models for telematics UBI products:

Answer 3

1. Based on total mileage, time of day, and a set of predefined events.
2. Based on more granular data about the vehicle use.

Question 4

List 2 advantages of UBI models that are based on more granular data:

Answer 4

1. The researcher can identify predictive variables more quickly, because once they identify one that could potentially be predictive, they should already have the data available to test their hypothesis
2. The researcher can identify specific risky driving behaviors and convey this information to the driver, so that the driver may be coached to make corrections to improve their driving safety.

Question 5

List some Consumer benefits of telematics:

Answer 5

• Possible lower premiums
• Ability to control premiums
• Enhanced safety & improved claims experience
• Households with young drivers will appreciate the focus on education and promoting safety
• Benefits due to the continuous connection of the telematics device (Faster emergency response time/ Road side assistance / Stolen vehicle recovery/ Fuel efficiency/ Vehicle maintenance support)

Question 6

List some reasons that premiums may reduce:

Answer 6

• Participation discounts
• Improved driving performance
• Voluntary reductions in mileage driven
• Subsidy elimination

Question 7

Insurer benefits include:

Answer 7

• Reduced claim costs
• Better risk pricing
• Mitigate adverse selection and moral hazard
• Modify risky behavior
• Improved brand recognition/ awareness & loyalty
• Differentiate their product offerings
• Create new revenue streams

Question 8

Insurers that offer Telematics based UBI will have several competitive advantages:

Answer 8

• They can identify the lowest risk drivers and increase the retention for this group
• They may gain more business, as potential customers may be attracted by the potentially lower premiums.
• Insurers are provided with new methods in which to communicate with policyholders.
• Claims management will be enhanced.
• Since the insurer can analyze the real time driving data, it can more accurately estimate accident damages and reduce fraud & claims disputes
• Programs will help for stolen vehicles to be tracked & recovered
• Early adopters will benefit from the rich driving behavior data that will be collected. Competitors who lack similar data will struggle to price appropriately.

Question 9

List some benefits of UBI to society:

Answer 9

• Fewer accidents
• Less congestion
• Lower carbon emissions & dependence on fossil fuels
• Rates that are more socially equitable (eliminate the cross subsidy between low mileage and higher mileage drivers).

Question 10

Consumers have two main public policy goals for insurance:

Answer 10

1. Ensuring that all consumers have access to essential insurance products.
2. Insurance is the core method for loss reduction and risk mitigation.

Question 11

List some consumer concerns about the UBI programs:

Answer 11

• Privacy and the insurer’s ability to protect their personal data.
• Distribution of data by insurers for purposes other than loss mitigation and pricing
• Reduced offerings of UBI programs to consumers in low & moderate income and minority communities
• Failure to achieve material loss mitigation, due to the black box approach
• Use of telematics as just another data mining exercise that penalizes consumers because of where and when they drive, which is heavily impacted by where they work and live
• Limited regulatory oversight to date

Question 12

List some Regulator Concerns of UBI:

Answer 12

• storage & reporting of private data

* rating factors used to calculate the UBI premiums

Question 13

Provide some recommendations for regulatory framework for telematics programs:

Answer 13

• Establish data ownership & privacy standards
• Establish standards for permitted and prohibited uses of consumer data
• Collect & analyze granular data on offers and sales of UBI programs related to prohibited risk classification factors
• Require that insurers include variables for race and income in GLMs
• Create standards for disclosure of telematics results and ratings programs, to ensure that consumers have the necessary feedback to alter their behavior
• Replicate the analyses that are presented by insurers in summary form
• Stop offering “discounts” unless the rating factor can be correlated with lower claims

Question 14

List 4 types of telematics devices being used today:

Answer 14

1. dongle
2. black box
3. embedded
4. smartphones

Question 15

Briefly describe the dongle device:

Answer 15

Self installed device that will be used for a period of time (often 6 months). This is the most popular option in the US

Question 16

Advantages of dongle:

Answer 16

• relatively low cost
• high reliability
• Can be installed by the driver
• Re-usable
• Can be transferred to another vehicle
• Automatically turns on with the car’s ignition
• Generates high quality & secure data on location & driving style

Question 17

Disadvantages of dongle:

Answer 17

• Can only be used in modern vehicles
• Vulnerable to fraud
• It will soon (12-18 months as of time of writing) will be technologically obsolete

Question 18

Briefly describe the black box device:

Answer 18

Professionally installed device, which is considered to be one of the most secure and reliable options. It can be used with both programs based solely on mileage (PAYD) and programs that are based on both mileage and driving safety (PHYD).

Question 19

Advantages of the black box device:

Answer 19

suited for first notice of loss (FNOL) because it is fixed in the car chassis, and therefore can provide early notice of theft, as well as valuable information for forensic crash reconstruction in the event of an accident.

Question 20

Disadvantages of black box device:

Answer 20

• Not portable

* Most expensive (high installation & administration costs)

Question 21

List advantages of embedded devices:

Answer 21

• Product differentiation
• Improved customer relationship management
• Potentially lower costs if there are product recalls

Question 22

List disadvantages of embedded devices:

Answer 22

• Higher cost for the consumer (this option is often subscription based)
• Not standardized
• Potential issues with compatibility with insurance
• Obsolescence (automobiles often have a long product cycle, and so the technology is often outdated by the time the car is released)

Question 23

List advantages of the Smartphone option:

Answer 23

• they are usually equipped with relevant sensors, including GPS, accelerometers and gyroscopes.
• they have large data storage capacity (infinite with the cloud), and superior communication capabilities.
• there are no device, installation, nor data connectivity costs to the insurers (and no additional costs to consumers).
• the smartphones can do a large amount of the data processing, which will help reduce the data handling and storage costs.

Question 24

Describe why the smartphone option has not taken over the market:

Answer 24

This may be due to limitations associated with the quality of data and reliability of measurement data that smartphones can provide: the accelerometer data is not calibrated, and the cellular gyroscopes need to be continually adjusted based on the phone’s changing position.