Often times, when a new technology enters the world, it can take a little while for markets to figure out what to do with it (or in the case of the Segway, an infinite amount of time). Other times, smart people know exactly what to do with it, as is the case for Usage-Based Insurance (UBI). Instead of using the theoretical “average” driver to set rates, UBI is when insurance providers measure the telematic signals of a car to determine the specific actions of a driver, and tailor a policy rate based upon that performance.
Car manufacturers and repair shops have been using automotive telemetry for decades, but the further distribution of that data to other players is a more recent phenomenon. This has lead to the ideation of all sorts of possibilities: cars talking to other cars and city infrastructure, big data analytics to optimize traffic patterns and automotive life-cycles, real time information for parking availability. Applications for the connected car seem endless.
But, the first group of companies to utilize this information in a big way are insurance companies. And when I say big, I mean BIG. As you can see in the figure below, it’s projected that over 100M people will be using UBI within the next 5 years, for a CAGR of around 80%.
Projected Global Usage-Based Insurance Subscribers
Source: US Dept of Transportation, RITA
The image below shows how insurance companies are currently using telematics, such as the time spent driving and safety-related functions like acceleration and speeding. My guess is that each one of these categories will grow over time.
Percent of Insurers Using Specific Telematics Data for Pricing
Source: SMA Research
In my opinion, the auto insurance market is ripe for disruption from a new entrant. One effect of accurately measuring each driver’s habits will be to make those drivers safer over time (as they see the feedback in their insurance costs and modify their behavior). This is obviously a good thing for society. However, large existing insurance providers will see their margins squeezed via lower policy prices, and even though they may try to stay on the forefront of this technology (like we’re seeing with Progressive), their large overhead costs may make them non-profitable. Smaller entrants, such as MetroMile, who offer Pay-As-You-Drive (PAYD) insurance and do not have a lot of overhead, could be poised to eat up a lot of this space.
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