Why Auto Insurance May Become Behavior-Based Soon

CMT’s research found that only 20 percent of survey respondents have full clarity into how their auto insurance provider sets their policy rates. Nearly three out of every four drivers (73 percent) surveyed believe rates should be based on how safely they drive, as opposed to traditional demographics like the location of where they park (4 percent), age, gender and marital status (4 percent), credit score (4 percent) and income (8 percent).

“While the conventional model worked well for insurers in the past, only leveraging traditional data points represents a losing scenario for everyone today. We’re seeing insurers struggle to accurately predict risk which impacts loss ratios and the bottom line, and way too many safe drivers are experiencing sharp premium increases due to the risky behaviors of others,” said Sam Madden, co-founder and chief scientist at Cambridge Mobile Telematics. “The advent of smartphone telematics adds a level of transparency that both customers and insurers can trust, and helps auto insurers price drivers based on what matters most: how well they drive.”

Despite consumer interest in telematics, only 22 percent of drivers surveyed by CMT have been offered a behavior-based insurance (BBI) program. The urgency for auto insurers to take a new approach remains extremely high – the industry continues to experience mounting losses and customer dissatisfaction is rising. Survey respondents were asked in what situations they would consider switching providers:

• 75 percent said a significant price increase
• 62 percent said poor customer service
• 56 percent said a failure to quickly and effectively address claims
• 54 percent said not receiving a fair payout from claims
• 47 percent said lack of transparency into rate increases and pricing

“Smartphone telematics provides a natural answer to many of these customer frustrations,” said Madden. “The data and analytics help insurers build better risk pricing models, while the app provides driving feedback for increased transparency and better customer engagement.”

Of all age groups surveyed, millennials showed the most interest in the features, functionality and benefits offered by mobile telematics programs. In fact, 25 percent of millennials indicated that becoming a better driver was a key motivator in signing up for a behavior-based telematics program – 7 percent higher than the general population. The survey also found that millennials are interested in leveraging social features to monitor the safe driving habits of friends and family.

“The interest from young drivers is great news for the auto insurance industry. They want to become better drivers and are actively concerned with the safety of their friends and family,” said Madden. “By providing trip-by-trip feedback and gamifying the driving experience, smartphone telematics has proven successful in minimizing risky driving behaviors, and enabling carriers to identify and attract the safest drivers at an early age, and retain them for life.”

Telematics plays a vital role in improving driver behavior, leading to reduction in crashes and the number and severity of claims. An analysis of CMT’s DriveWell program users shows an average of 35 percent reduction in phone distraction after 30 days of enrollment and a 20 percent reduction in both speeding and hard braking. In a recent survey of users of Desjardins’ Ajusto BBI program powered by CMT, nearly 75 percent of users reported improvements in driving behavior with an overall 91 percent user satisfaction rate.

With an increasing number of drivers, miles driven and greater opportunity for distraction on the road today, there is a strong motivation to improve risk pricing and encourage drivers to improve their driving behavior. Given that policyholders are demanding greater price transparency, the implementation of holistic BBI programs seems inevitable.