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Usage-based Insurance: How it Works & Why Offer it

By August 17, 2021February 27th, 2024No Comments

Usage-based insurance offers a great compromise between auto insurers and policyholders.

As insurers aim to adopt long term, cost-effective strategies behind new products, policyholders seek coverage to fit their unique lifestyles. Usage-based Insurance is an auto insurance offering that leverages innovative technology with common sense principles modern drivers can understand. It’s estimated that by 2026, the global usage-based insurance market will increase 27.7%, reaching $66.8 billion.

WaterStreet Company offers P&C Insurance Solutions to help unify data into one easy workflow, connecting carriers, MGAs and other insurers to any variety of third-party solutions.

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Usage-Based Insurance

Usage-based Insurance (UBI) allows carriers to offer lower premiums as a reward to safe and lower-mileage drivers while better assessing risk against similar pools of drivers.

Premiums for UBI can work in either of two ways:

  • Mileage: Drivers pay rates according to miles driven. Policyholders typically have a base premium and additional cost per mile.
  • Behavior: Drivers pay based on a safe driving score. Criteria is based on many factors, such as time of day driven, quick acceleration and more.

Each method allows drivers to pay as they use their vehicle, providing a cost saving benefit to the policyholder and sustainable rates for the insurer.

The most common car insurance policies are time-based. A policy takes effect for a designated amount of time, such as 6-months, and the policyholder may pay monthly. With UBI, payment can also occur as the car is used. Rather than paying a set amount per month, carriers could offer per mile with the amount changing each monthly payment depending on the car’s usage. The car may not be insured when it is not in use in this case.

How Insurers Provide Usage-based Insurance

UBI relies on pools of opted-in drivers sharing information on their driving habits with their auto insurer. Insurers are able to segment risk across different pools for accurate scoring.

Within the last 10 years, improved sensor technology has given insurers more accessible and accurate data shared directly from drivers and their vehicles. Telematics data can be shared with insurers through mobile phone applications or even sensors directly in the vehicle.

When applied to the auto industry, the following telematics data can be collected.

  • Car mileage in real time
  • Total driving time per drive
  • Times of day the car is driven
  • Speed of the car at different times and locations
  • Accelerating data, for how quickly the car accelerates
  • Braking data, for how hard the car brakes

Drivers can share telematics data in real-time for insurers to accurately adjust premiums according to the driver’s policy. Some insurers can also offer accurate UBI rates at the point of quote thanks to more recent advancements in the data sharing capabilities of automakers.

A challenge for many of today’s carriers involves the enormous amounts of Big Data generated from emerging fields, such as telematics. WaterStreet Company provides scalable, cloud-based software built with a robust API for connecting to any variety of third-party solutions.

UBI & Cyber Security

Many policyholders may be hesitant to enroll in usage-based programs due to privacy and security concerns.

With the rise of self-driving cars and heightened collection of telematics data, manufacturers are pressed to become technology companies to adapt to withstand greater risk. Many electric car owners fear charging stations may become vulnerable to hacking, for example. Cyber insurance has gained traction as more policyholders understand the risk behind data breaches and carriers craft policies to fit these unique risks.

We’ve so far discussed how self-driving cars place liability on the manufacturer in the case of an accident, and the future of who is responsible in the case of a car “hack” is due to follow.

WaterStreet Company & Usage-based Insurance

Carriers need robust and unified solutions in order to support the amount of data telematics generates. WaterStreet Company partners with solutions for Usage-based Insurance, including LexisNexis for offering rates at the point of quote.

Our API and web services offer full interoperability and integration across any variety of third party-systems and services on a cloud-based network.

Reach out to WaterStreet Company today to request a consultation and demo.

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