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Usage-based Insurance: New Age Of Insurance Underwriting

The new buzz in the auto insurance industry is usage-based insurance (UBI). This system of underwriting is facilitated by a technology known as telematics. It is a beautiful innovation developed from the amalgamation of three diverse fields- telecommunication, analysis and financial calculation. It involves a monitoring device which is installed in the vehicle. It transmits the information relating to the driver’s behavior and other driving specifications on a real-time basis to insurance companies based on which the premium amount is calculated. This phenomenon is contributing the companies to generate leads quickly since the premium payables are directly proportional to the driving performance. Therefore, the insured is motivated to drive safely. As per the recent report in www.ft.com, telematic devices have been gaining popularity in commercial vehicle market to be used for managing and accessing the driving safety and performance data of their fleet in a better way.

Usage-based insurance has revolutionized the insurance sector replacing the traditional, outdated risk and premium assessment methods. Specific business models which work under UBI includes pay as you drive, pay how you drive and manage how you drive. The telematic devices measure various factors like miles covered, GPS location of the vehicle, halts taken, the frequency of sudden brakes, rapid acceleration, hard cornering etc. These factors are then carefully analyzed by the insurance adjuster to derive the premium amount chargeable based on the driving performance. It has been observed that with the adoption of these insurance options, the number of accidents and cases of rash driving have gone down tremendously.

The telematic devices which are used include:
· Diagnostic port device: It is attached to the central electronic control system of the car. Therefore, every detail regarding the speed, brake application, gear adjustments and mileage calculation is captured and transmitted through a modem to the insurance company repository.
· Interactive devices: These devices use GPS based systems instead of connecting to the electronic control system to record statistics like geo-location and distance covered.
· Smartphone App: These new age apps record the driving details onto your phone and through your phone’s network connection, the data is transmitted to the insurance company database.

Specific advantages of using telematics in auto insurance include:
· Encourages safe driving: Since the premium calculation is majorly influenced by the recorded driving behavior, drivers are motivated to drive their vehicle more safely.
· Reduces claim volumes: An indirect effect of these performance-based payments is a drastic decrease in the occurrence of road accidents and as a result, lesser claim cases for insurance companies.
· More accurate and satisfactory claim settlement: Since the insurance company’s database has every minute details and statistics of the driving pattern and geo-location, it allows the insurance company to do a closer analysis of the data, damage caused and settle the claims more efficiently.
· Helps insurance companies to develop a customer base of authentic and low-risk policyholders. Since the claim payout is comparatively less, their yearly margins also increase.

Currently, the usage-based insurance is still in the very initial stages of marketing and that too only in few developed countries. Therefore, considering its advantages to the insured and insurer, companies should make an effort to buy into this technology and expand its market.

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