Usage-Based Insurance in the motor insurance industry is a form of coverage that has quickly become popular with drivers and providers alike. This type of insurance usually uses telematics technology to capture customer driving data and then charge customers based on how much they use their vehicle, their average speed, and other driving habits. It provides customers with more accurate rates that better reflect their individual usage and skill, therefore rewarding good drivers and penalizing those who are not as careful.
Global Market Insights estimate that Usage-Based Insurance will be worth more than $350 billion by 2032, with a Compound Annual Growth Rate (CAGR) of over 23.5% over the next 10 years. Here are some of the major benefits of this growing form of insurance, and some of the risks that will need looking at so the sector to reach its full potential.
There are several benefits to Usage-Based Insurance that will help propel it forward in the coming years. During the Covid-19 lockdowns, many consumers found themselves using cars less, and as such felt that their insurance premiums were not reflecting the time spent in their car. Usage-Based Insurance solves this issue by directly linking premiums paid by customers to how safely and how frequently they use their vehicles. This makes for a fairer policy that also encourages less risky driving, making sure everyone is safer and happier on the road.
The fairer and rewarding nature of these policies will also lead to higher customer satisfaction- at least for good drivers, as some studies have shown. This will lead to stronger relationships between insurers and consumers.
In addition to the benefits for customers, it is becoming cheaper and easier than ever for insurance providers to offer Usage-Based Insurance policies. Initially, data collection for these policies relied on wireless devices that accessed driving data through on-board diagnostics, which could be prohibitively expensive for insurance companies to offer. However, improvements in technology through smartphones and connected vehicles makes sure every driver has access to the data collection methods necessary for Usage-Based Insurance.
Also, due to the way these policies reward safer driving, the customers opting into Usage-Based Insurance are less likely to need to make insurance claims- making them less risky customers for providers. Many providers plan for roughly two-thirds of revenue from premiums to go towards claims, but reduced amounts of claims allow for higher profit margins.
The Usage-Based Insurance industry faces several challenges that will have to be addressed to ensure its continued growth and success. The biggest challenge comes from privacy concerns since this type of insurance requires detailed data about a customer’s driving habits. Some customers may be reluctant to have insurers keeping track of such in-depth information, and others may have concerns about how securely it is being stored. Providers may have to invest in robust data security, both to ease customer concerns and protect insurer liability. This may drive up operating costs.
Additionally, the accessibility of data collection through smartphones is appealing from a cost perspective- however, the quality of the data could suffer, leading to less accurate information. Insurance companies will have to work out how much they are willing to invest in technology for higher quality data, guaranteeing their customers the most accurate and fairest rates.
In conclusion, Usage-Based Insurance is quickly becoming one of the most popular forms of auto coverage among both individuals and companies alike. While there are still some challenges facing this industry- such as privacy concerns- there are also plenty of drivers that will help it continue growing in the coming years: including technological advancements, affordability for both consumer and provider, and high satisfaction among users. With these factors working together, it is safe to say that Usage-Based Insurance is here to stay.