Moody’s: Auto Insurers Offering Usage-Based Products Gain Advantage

24 Dec 2011

According to Moody's Investors Service, personal-auto insurers at the forefront in offering usage-based insurance products will gain "a significant competitive advantage" in pricing and policy retention, while companies that don't offer such products may face adverse selection in the future.

"Adopting UBI (usage-based insurance) sooner rather than later will not only attract better drivers willing to participate, but will also allow carriers to build and maintain a database on numerous variables that influence loss costs", Moody's says in its Weekly Credit Outlook. The agency further explains that obtaining sufficient vehicle-operation data through UBI allows insurers to "incorporate variables into their pricing models that are more correlated with loss cost, leading to significantly enhanced predictive modeling capabilities."

Measured through the use of in-car telematics devices, which record data related to vehicle operation and deliver it to insurers, UBI determines the cost of insurance.

According to Moody's, most major personal-auto insurer offer a version of UBI, with Hartford Financial Services became the latest company to join in company with Allstate, GMAC, Liberty Mutual, Nationwide, Progressive, State Farm and Travelers.

"Some insurers have not embraced UBI because of the very high cost of implementing the product, data-privacy concerns over telematics devices, and patent control," notes Moody's, adding the cost of the devices declines and patent disputes are clarified, UBI should grow and price competition should intensify.

For insurers that do not offer UBI in the future, Moody's says they may face adverse selection "as insurers that do not vary their prices based on actual driving behavior will be faced with demand from higher-risk drivers."