- The usage-based insurance market is set to gain importance due to the pandemic.
- The UBI market is expected to reach $125.7 billion globally by 2027 at a compound annual growth rate of 23.0%.
In our recent Usage-Based Auto Insurance Report, we discussed how this business model, which enables insurers to charge customers per mile they’re driving or based on their driving behavior, rather than demographic information, will continue to grow in importance. The usage-based insurance (UBI) market is expected to reach $125.7 billion globally by 2027 at a compound annual growth rate of 23.0%, up from an estimated $24 billion in 2019, according to Reportlinker.com.
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The coronavirus pandemic is driving the need for alternative insurance models to replace conventional policies. In response to consumers driving less due to lockdown restrictions, many auto insurers had to compensate their customers: Liberty Mutual offered users a 15% refund for two months of their auto premium, for example.
While this is a quick fix for the issue, the long-lasting effects of the pandemic will create a new normal where jobs will become more flexible, leading to more inconsistent driving habits. We already predicted earlier this year that usage-based auto insurtechs Metromile and Root in the US and UK-based Zego will grow at a stronger rate in 2020 compared with 2019, propelled by the shortcomings of traditional auto insurance laid bare by the lockdown.
To develop such an offering, insurers need to consider what kind of data they want to collect and which IoT devices they’ll use to do so.
- Insurers should take behavioral factors into consideration and price policies according to mileage. Insurers can either focus on driving behavior to price customers’ risk based on how safe they’re driving, or price policies by how many miles users are driving. However, they can get the best UBI result when combining both these methods to include both safety and mileage in their pricing models. This also gives users an incentive to drive more safely and less, which can help drive down the likelihood of an accident, reducing the claims payout amount for insurers.
- They can use smartphones or external IoT devices to collect data, but connecting directly to the vehicle will be a game changer in the industry. Insurers typically either collect data with a user’s smartphone — which, while easy to set up, has come under fire for not always correctly collecting data — or an IoT device that connects to the OBD-II port of a vehicle. Insurers have to provide the latter device, but it also records data more accurately. That said, insurers can also partner with original equipment manufacturers, which is becoming a more prominent way to collect data as more connected cars are being manufactured, giving them direct access to vehicle data.
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