Usage-based Auto Insurance (UBI)

Transcription

2 What if you found a new product that......further refined risks so that the worst segment s loss ratio was five times higher than that of the best segment?...was self-selected by customers who have longer retention and a loss ratio 15% better than the rest of your book?...helped the majority of insureds reduce their accident frequency by more than 20%?...enabled you to significantly differentiate your product from your competitors?...was embraced by regulators and, in some cases, even subsidized by the government? Would you use it? 2

3 Usage-Based Insurance (UBI) Customer Feedback Insurance Premium $1,200 $1,080 $1,000 $ 900 Company Feedback Vehicle Score VIN: Miles driven: 6,234 Event 1 per mile:.05 Event 2 per mile:.01 3

4 Why is UBI game-changing? Differentiates product offering by offering additional services Significantly increases pricing accuracy Appeals to consumers as it makes sense, is controllable and minimizes reliance on controversial proxies Attracts lower-risk insureds via self-selection Allows customers to understand and eliminate risky behaviors, actually reducing accident frequency Improves claims handling Better Pricing Risk Reduction Claims Handling Self Selection Increased Profits and Retention Customer Satisfaction All of these advantages lead to increased profits and improved retention. 4

5 Appeals to participating consumers Improves driving behavior Controllable Makes sense and reduces reliance on proxies Insurance credit scores Driver assignment Charges for relatively rare accidents, convictions Ancillary services Voluntary with consent form Ability to drop out 5

6 What is the perspective of the consumer? Understand it and like to control their premium Consumers don t like the use of credit scores because it doesn t make sense Generally speaking, good drivers opt in, get participation discounts, and have the opportunity for even greater discounts Want access to useful driving feedback Accidents are the leading killer of teens; UBI programs give parents a variety of tools to help monitor and counsel their teen drivers Many adults are faced with elderly parents whose driving is deteriorating. UBI can help evaluate skill deterioration and provide helpful safety tips Like options for value-added services Consumers generally like options Programs vary from basic to deluxe in their service offerings Value companies that are green and progressive Society is becoming increasingly environmentally conscious, and consumers value companies that are green Younger consumers like new and different products even when the product may not appeal to them Most consumers view UBI favorably and participants are very satisfied 6

7 How do regulators feel about UBI? Want variables that are fairly discriminatory Like that UBI makes sense and is controllable All provinces require that rates are adequate and not excessive or unfairly discriminatory UBI varies rates based on driving behavior, which has been proven to be predictive and is clearly fair Need to ensure that start-up costs are allocated to the right cohort Regulators are concerned with factors like credit that don t make sense to consumers; UBI makes sense Regulators prefer variables that give the consumer control to reduce costs without reducing coverage Support green initiatives Safer driving and fewer miles significantly reduce emissions Endorse efforts to save lives Highway accidents result in approximately 200,000 injuries and 3,000 fatalities in Canada each year, and the government seeks to reduce that through various programs Driver feedback significantly reduces risky driving For these reasons, regulators are anxious to approve UBI programs 7

8 What does it mean for the company? Better pricing The predictive power of the telematics data is undeniable Initial programs included relativities from 0.39 to 1.09 on top of the existing rating plan, highlighting the additional segmentation power Product differentiation and brand awareness Some programs are very basic discount programs that will appeal to pricesensitive groups; more sophisticated programs offer a wide variety of valueadded services that differentiate the product UBI programs promote the idea that the company is modern and green Reduced loss costs Consumer satisfaction and retention Consumers understand UBI, so there is a significant self-selection effect Behavioral modification programs have been shown to significantly reduce risky driving and, consequently, accident frequency Potential for further reduction by using data in claims handling Consumers want to pay less for their insurance and UBI gives discounts that only their current carrier can offer (as others don t know their driving behavior) Ancillary services (e.g., teen tracking) greatly appeal to certain consumers and make the insurance product more valuable to them Retaining existing customers is significantly cheaper than adding new ones UBI programs lead to better retention and greater profits 8

9 CAS Statement of Principles Regarding Property and Casualty Insurance Ratemaking Principle 1: A rate is an estimate of the expected value of future costs Principle 2: A rate provides for all costs associated with the transfer of risk Principle 3: A rate provides for the costs associated with an individual risk transfer Principle 4: A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer 9

10 CAS Statement of Principles Regarding Property and Casualty Insurance Ratemaking (continued) Considerations selected excerpt: Exposure Unit The determination of an appropriate exposure unit or premium basis is essential. It is desirable that the exposure unit vary with the hazard and be practical and verifiable Homogeneity Ratemaking accuracy often is improved by subdividing experience into groups exhibiting similar characteristics. For a heterogeneous product, consideration should be given to segregating the experience into more homogeneous groupings. Additionally, subdividing or combining the data so as to minimize the distorting effects of operational or procedural changes should be fully explored Credibility Credibility is a measure of the predictive value that the actuary attaches to a particular body of data. Credibility is increased by making groupings more homogeneous or by increasing the size of the group analyzed. A group should be large enough to be statistically reliable. Obtaining homogeneous groupings requires refinement and partitioning of the data. There is a point at which partitioning divides data into groups too small to provide credible patterns. Each situation requires balancing homogeneity and the volume of data 10

11 CAS Statement of Principles Regarding Property and Casualty Insurance Ratemaking (continued) Considerations selected excerpt: Individual Risk Rating When an individual risk s experience is sufficiently credible, the premium for that risk should be modified to reflect the individual experience. Consideration should be given to the impact of individual risk rating plans on the overall experience Risk The rate should include a charge for the risk of random variation from the expected costs. This risk charge should be reflected in the determination of the appropriate total return consistent with the cost of capital and, therefore, influences the underwriting profit provision. The rate should also include a charge for any systematic variation of the estimated costs from the expected costs. This charge should be reflected in the determination of the contingency provision 11

12 Risk Classification Statement of Principles The grouping of risks with similar risk characteristics for the purpose of setting prices is a fundamental precept of any workable private, voluntary insurance system This process, called risk classification, is necessary to maintain a financially sound and equitable system It enables the development of equitable insurance prices, which in turn assures the availability of needed coverage to the public Three primary purposes of risk classification: protect the insurance system s financial soundness; be fair; and permit economic incentives to operate and thus encourage widespread availability of coverage Statistical criteria: Statistical significance, Homogeneity, Credibility large enough and/or stable enough 12

13 Other Considerations (other than actuarial that is ) Acceptability / measurability / use of proxy e.g. is age proxy for driving behaviour? Political considerations? Mandatory pools / regulation / if not affordable Operational criteria: objective, inexpensive to administer, verifiable Social criteria: affordability, causality, controllability, privacy concerns Legal criteria 13

14 UBI (in personal auto) will continue to evolve to provide value beyond discounts Influence drivers to improve driving behavior Potential to save lives and significantly impact profitability Compelling proposition for the broader market beyond the self-selectors Creates long-term customer stickiness Protect the insured and family Example: Parent-teen relationships Enhances overall value of customer relationship Simple rating-based program Discount driven, leverage self-selection Target, attract and retain high-profit customers as they are Introduce range of new services Customers opt (and pay) for services they value Insurer uses these services to differentiate product UBI-related technology and applications are also changing rapidly solutions must evolve at a faster pace than typical for insurers 14