The Opportunity for Usage-Based Insurance

While there seems to be a general consensus that the current COVID-19 pandemic will have drastic, long-term effects on the auto insurance industry, it seems that most of the writing on the subject consists solely of predictions written over a year ago.  However, in many jurisdictions, regulations are indeed changing in response to the pandemic to allow more options for usage-based or behavior-based insurance products.  To better understand how consumers view the current state of auto insurance, Allegory has recently completed a survey of Canadian drivers; with a focus on understanding their attitudes towards usage-based, behavior-based, or other approaches to insurance using telematics technology.

We asked a sample of 500 Canadians a total of eighteen questions about their current insurance and their thoughts on potential alternatives.  This group was made up of Canadians from provinces that are not required to purchase insurance from a crown corporation or government agency (i.e. Alberta, Ontario and Quebec), whose demographics are representative of the larger population.

The first question we asked was about how people completed their most recent car insurance purchase process.  It’s no surprise that most consumers simply renewed their current policy. Even with moderate increases in premiums, this is still by far the simplest way to purchase a policy if you already have an existing relationship with a broker, agent, or insurer that you trust.  Overall, 72% of respondents ended up renewing their policy through their existing agent, broker or insurance company.  However, 25% of respondents did buy through digital channels, such as directly through a digital insurance company (e.g. Sonnet, belairdirect), an online broker, or price comparison website.  Because digital channels are such a small percentage of overall policy purchases, this could be evidence of a real opportunity to capture market share through digital channels for an insurer, broker, or agent that has the right approach.

We next asked questions to better understand respondents’ feelings towards their car insurance, specifically what their decision-making process could have been as they went through their purchase process.  Given the news over the last year about rising premiums and concerns consumers have had about prices being too high now that they’re driving significantly fewer miles, we tried to gauge if people feel they’re paying a fair price.  At least two thirds of respondents felt as though they were paying too much for their car insurance, taking into consideration how much, or how, they drive.

To get further insight into why people decide to buy one policy over another, or how they differentiate between insurance companies, we next asked respondents to rate what specific factors influenced their decision.  Given that two thirds reported feeling they pay too much for insurance, it was no surprise that 90% listed price as moderately, mostly, or clearly influencing their decision, with 30% stating that they were significantly influenced by the final offered price.

When comparing across regions, price was also the most significant factor amongst respondents from both Ontario and Alberta, with respondents from Quebec listing value-added services as the most significant when making a final purchase decision.  With coverage and deductible options, claims process efficiency, digital presence, and brand awareness covering the major significant factors that go into deciding which insurance products to purchase, it seems that there still remains plenty of room for innovation in auto insurance. Though how that happens will of course depend on an individual carrier's expertise and market focus.

Going back a few years to 2017, Accenture put together a very interesting study that dived into how the insurance industry (not just auto or P&C) was changing, attempting to identify archetypes that could help brokers, agents, and insurance companies adapt [1]. When it came to auto insurance, they discovered that personalization in services was a key component in providing value for consumers.  That is, helping every individual, based on their profile, understand and manage the risks that they face.

While this is all well and good, we do have to remember that even back in 2017 people were aware of, or at the very least starting to become aware of, how valuable the data that they produce on a daily basis actually is to companies, especially insurers.  This is important because this information guides and enables insurers to be open and honest with their prospective customers about what their personal information is worth.  Thankfully, it’s possible to personalize offerings with this data if you’re willing to offer value-added services as compensation, something Accenture also investigated.

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While there has yet to be an update to this specific survey, it stands to reason that consumers would still be willing to exchange their personal information for services that were worth it. Accenture identifies the obvious ones such as lower premiums, priority (or value-added) services, and personalized advice to reduce risk or become a safe driver.  In our view, this level of personalization can only be achieved through digital channels (such as a mobile application) that engages drivers directly, constantly delivering value.  Based on the survey responses above, using telematics to help drivers improve their driving to ultimately lower their insurance premiums can be incredibly valuable to drivers.

Insurance programs that use telematics have existed for a while now, so to see how prevalent they are in the minds of drivers, we next asked respondents if they had ever participated in a telematics insurance, usage-based insurance (UBI), or a pay-how-you-drive (PHYD) program. While it was interesting that 85% of people had not used any of these programs, it was even more interesting that 54% of those respondents that had not used telematics didn’t even know they were a possibility.  

Of the remaining reasons that respondents picked for never having used a telematics program, privacy concerns remain significant with almost half of the respondents that were aware of these programs choosing not to use them for this reason.  Also, of those respondents that were aware of telematics, UBI, or PHYD programs, over one fifth just didn’t see the value in them.

We then asked respondents if they would be open to using a mobile application from an independent third party that could offer them a premium based on how they drive, how much they drive, and what kind of car they drive.  When asked to choose multiple reasons for why they would use such a mobile application, 65% of them said that they would, with over two thirds of those that would, 67%, indicating that one of the reasons that they would is because they believe that their insurance should be based on their driving habits alone.

When broken down by age group, the number of respondents who would use a mobile app to measure their driving was fairly even across all ages. This runs counter to previous surveys that showed that openness to mobile application usage for auto insurance heavily skews younger.  This could imply that the right product can capture not just new, young drivers, but help insurers acquire customers with an already proven track record of driving safely.

Finally, we asked respondents what features they would like to see in a mobile application that determines a fair price for an insurance premium based on their driving behavior.  Not surprising was that over half wanted notifications when they could get a cheaper insurance premium.  As far as privacy goes, protecting personal data, and for a third party to not share things directly with their insurer, is the second priority for respondents.

Even after privacy concerns, many of the features that respondents value can ultimately help them save some money, whether it’s to improve their drive to eventually save on premiums, or alerts when there’s cheap gas in their area or along the route that they’re driving.

Putting all of this together, there is a potentially significant opportunity when it comes to usage-based, telematics, or behavior-based insurance.  With the right technology partner, one focused on helping drivers pay a fair premium for a policy based on how, or how much, they actually drive, it is possible to acquire customers across all demographics; not just acquiring new drivers through digital channels focused on younger cohorts.  Because awareness of UBI is still quite low, it’s definitely possible to catch the attention of drivers by engaging them digitally with truly value-added services that are perhaps outside the traditional domain of auto insurance.

That’s what we at Allegory have been hard at work building: a new approach to engaging drivers not just to help them cut costs to save a few bucks on premiums, but a digital platform to provide people direct value.  This means that while we’ve built unique technology to measure the risk of a driver to insure, we’ve coupled it with a full infrastructure so that our insurance carrier customers can accelerate their UBI plans, and hit the ground running to capture customers that appreciate the value that they can offer.

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References:

[1] Accenture Financial Services. "The Voice of the Customer: Identifying Disruptive Opportunities in Insurance Distribution" 2017 Global Distribution & Marketing Consumer Study.

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