Usage-based Auto Insurance (UBI)

Transcription

Usage-based Auto Insurance (UBI)
A revolution is underway. Is your company ready?
A presentation to 2013 CIA Annual Meeting
by Pierre G. Laurin
June 21, 2013
© 2013 Towers Watson. All rights reserved.
What if you found a new product that...
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...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?
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© 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
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Usage-Based Insurance (UBI)
Customer Feedback
Insurance
Premium
$1,200
$1,080
$1,000
$ 900
Company Feedback
Vehicle Score
VIN:
12345…
Miles driven:
6,234
Event 1 per mile:
.05
Event 2 per mile:
.01
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Why is UBI game-changing?
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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
Risk
Reduction
eliminate risky behaviors, actually
Better
Pricing
reducing accident frequency
Improves claims handling
Self
Selection
Increased
Profits and
Retention
Claims
Handling
Customer
Satisfaction
All of these advantages lead to increased profits and improved retention.
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Appeals to participating consumers
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Improves driving behavior
Controllable
Makes sense and reduces
reliance on proxies
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Insurance credit scores
Driver assignment
Charges for relatively rare
accidents, convictions
Ancillary services
Voluntary with consent form
Ability to drop out
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What is the perspective of the consumer?
Understand it and
like to control
their premium
Want access to
useful driving
feedback
Like options for
value-added
services
Value companies
that are “green”
and
“progressive”
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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
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
Consumers generally like options
Programs vary from basic to deluxe in their service offerings
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
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How do regulators feel about UBI?
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Want variables
that are “fairly”
discriminatory
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Like that UBI
makes sense and
is controllable
Support “green”
initiatives
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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
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Safer driving and fewer miles significantly reduce emissions
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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
Endorse efforts to
save lives
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For these reasons, regulators are anxious to approve UBI programs
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What does it mean for the company?
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Better pricing
Product
differentiation
and brand
awareness
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Reduced loss
costs
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Consumer
satisfaction and
retention
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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
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”
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
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CAS Statement of Principles Regarding Property and Casualty
Insurance Ratemaking
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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
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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
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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
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Risk Classification Statement of Principles
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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
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Other Considerations (other than actuarial that is…)
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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
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UBI (in personal auto) will continue to evolve to provide value
beyond discounts
Influence drivers to improve driving behavior
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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
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Example: Parent-teen relationships
Enhances overall value of customer
relationship
Introduce range of new services
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Simple rating-based program
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Discount driven, leverage self-selection
Target, attract and retain high-profit
customers “as they are”
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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
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Usage-based Auto Insurance (UBI)

Transcription

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