EMB Urges Auto Insurers to Get on Board the Usage-Based Trend
28 Jul 2008
If EMB is right, usage-based insurance will become the industry standard in the next five years.
So, the global actuarial consulting firm is urging auto insurers now to adopt this method, which measures actual driving behavior and allows insurers to develop more reliable rates.
While drivers get to enjoy lower rates, auto insurers will reap the benefits of greater customer loyalty and client retention.
The current pricing model relies on a number of variables, including gender, age, credit history, and marital status-all of which are predictive but not definitive. Usage-based insurance, on the other hand, uses driving data with which insurers can determine more accurate rates and encourage insureds to control these rates. For example, if a customer drives less, travels at reasonable speeds, brakes and accelerates gradually, and generally practices safe driving behavior, those habits can help lower his rates.
EMB warns that usage-based insurance won't become the industry standard without overcoming some hurdles. First, insurers must develop a method of obtaining data, either through driver self-reporting, existing tools such as OnStar, or new tools such as proprietary hardware that plugs into the on-board diagnostic port (OBD) and uses the car's internal computer to track driving behavior. The second challenge is how to retrieve and store the information, and a third is determining which data matters. Fourth, carriers must develop predictive models that stand up to regulatory scrutiny while considering the privacy of the customer. Along those lines, the industry must hammer out who "owns" the collected data: the consumer, the insurer, or the government.
Currently, usage-based rating is offered as an optional program, so the final challenge the industry will face is creating the terms and conditions of opting in and out of the program.
EMB believes carriers will solve these challenges as appropriate legislation is created, fair consumer guidelines are established, and companies begin to gather and analyze the data.
Robin Harbage, a senior consultant with EMB, predicts that insurers who don't get on board with the shift to usage-based insurance will lose their "good driver" customers because they will turn to usage-based carriers to get discounted premiums.
"There are significant challenges to creating a usage-based product, but the rapid development of technology and knowledge at this time make the shift in the auto insurance market a trend to which successful insurers will need to respond," Harbage said. "Immediate action and preparation are required in order to remain competitive when the spike in demand occurs."
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