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A complete guide to smartphone-centric usage-based insurance

Insurance
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A complete guide to smartphone-centric usage-based insurance
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Key Takeaways
  • Advancements in UBI technology are giving insurers an advantage when catering to today's consumers
  • While some past UBI programs have failed, successful smartphone-centric programs are comprised of 5 key components
  • Amidst changing regulations and a new era of consumer preferences, now's the time for insurers to invest in the right UBI program

Much has changed in the decades since telematics systems first emerged. Within the telematics insurance space, we’ve witnessed a shift from traditional hardware-based usage-based insurance (UBI) programs to even more powerful, scalable smartphone-centric programs. 

These advancements, which can open doors to critical mobility risk insights that result in successful, sustainable programs, have given auto insurers a new edge with UBI. That leg up comes at a particularly valuable time, as changing consumer preferences continue to accelerate digitization, personalization, and fairness in scoring across the market. 

Back in 2020, Bain’s pandemic-era survey of over 43,000 consumers found that 21% of respondents had already purchased usage-based auto insurance, and 56% said they would likely purchase it in the future. “Now, the economic uncertainty and price sensitivity caused by the pandemic may catalyze more switching to policies based on miles driven,” Bain reports.


Bain 2020 insurance survey


Elsewhere, a late 2021 Canada-based study of over 1,300 Canadians with auto insurance found that 41% of respondents said they would consider UBI due to the pandemic, and 15% have tried to participate in UBI. And according to Valuates Reports, the adoption of smartphones and connected devices has fueled a growth in UBI worldwide, with the overall market projected to reach $77.25 billion by 2026, from $25.46 billion in 2020. 

By now we’ve heard just how much of a catalyst the pandemic has been for many industries across the globe. And for auto insurers specifically, the pressure is on to get smarter and fairer than they’ve ever been before, all while creating more seamless, valuable experiences for their customers via driving apps.


Jonathan Matus UBI quote


In this complete guide to smartphone-centric usage-based insurance, we’ll explore what exactly usage-based insurance is and how it’s evolved, the benefits of smartphone-centric UBI, where it fits into growing issues around risk scoring fairness, and the anatomy of a successful program.

Here’s what you need to know.

What is usage-based insurance? A quick recap

For those who need a refresher, usage-based insurance is when an auto insurer calculates your premium based on your driving habits and behavior. Insurers use telematics systems like mobile applications (for smartphone-centric programs) or plug-in devices (for hardware-based programs) to track critical risk factors such as mileage, hard braking, distracted driving, speeding, and more. 

Telematics technology first emerged back in the 1960s-’70s, but it didn’t become widely used at the enterprise level until the 2000s. Originally, UBI was used as a tracking system only used in premium cars, but eventually came to rely on hardware devices installed in common vehicles. 

These devices included embedded black boxes, 12V connect systems, and Bluetooth Low Energy (BLE) beacons, to name a few, before UBI evolved further into smartphone-centric technologies that became a better source of behavioral and contextual risk predictiveness.

Evolution of UBI: Why it has failed in the past

Indeed, UBI is nothing new. It’s been around for over two decades now: one early pioneer, Progressive Insurance, developed a usage-based auto insurance product in the mid-1990s.

But in the years since UBI was first launched, insurers have faced many challenges when it comes to user adoption. In fact, only 5 million drivers have adopted UBI policies, with around a 5% penetration rate. 

6 reasons why UBI programs have previously failed

1. Lack of consumer awareness 

Some auto insurers simply aren’t doing enough to get the word out. A recent 2021 report conducted by The Zebra found that 52% of drivers do think it is fair to base auto insurance rates on driving behaviors, but a whopping 41% were unfamiliar with UBI altogether. The majority of those who weren’t familiar were Gen Z-ers - there’s a huge opportunity for insurers to better educate this increasingly important segment of customers. 

Another recent Canada report found that, of the 57% of respondents who claimed they’d heard of UBI, only 81% had actually tried it, “presenting an opportunity for brokers to educate consumers and sell them a money-saving product.”

2. Adoption & onboarding friction

Of the 60 UBI programs that exist in the US, 70% are smartphone-centric telematics programs. In recent years, hardware-based programs have seemingly been on their way out (we cover the benefits of smartphone-centric programs over hardware-based, below). 


smartphone-centric UBI programs


But some insurers still opt for hardware-based programs, which makes the adoption and onboarding process tedious for customers (and increases expenses for insurers). When not designed properly, some UBI programs can create friction in the sign-up process, making it difficult for policyholders to get started and get the instant gratification they’re looking for.

3. Cookie-cutter programs

Cookie-cutter UBI programs, put simply, just don’t cut it. That’s especially when meant for today’s consumers who demand more personalization from all industries. Focusing on the specific needs of customers is key, but this hasn’t always been the case with UBI in the past.

4. Limited discounts & lack of virality

Potential usage-based auto insurance customers need to be properly incentivized to try it. Offering a 5-10% discount simply isn’t enough of an offer to push policyholders to switch to a UBI carrier. And the average annual discount offered for good driving behavior is about $48. 

And because early adopters didn’t get the experience and value they were expecting, there was a lack of overall virality without sufficient word-of-mouth.

5. Evolving customer preferences

Speaking of a lackluster UBI experience, consumers’ preferences are changing, especially in this pandemic era. They demand more personalized, seamless digital interactions and rewarding experiences that will keep them coming back for more. Past UBI programs, even as technology shifted to smartphones, haven’t quite succeeded in catering to these evolving needs.

6. Data privacy concerns

Today, there are still concerns around data privacy when it comes to smartphone-centric telematics insurance (in general, 56% of respondents from the above-mentioned Canada survey said they were worried about privacy). It’s up to insurers to partner with the right technology providers in the future to ensure that data is kept secure and private. 

But it’s not all bad news when it comes to data: a 2019 Accenture study found that 64% of consumers are open to sharing their data in exchange for lower premiums based on their driving behavior.

Succeeding with UBI in today’s market

All of the above-mentioned reasons why telematics programs have previously failed to take off can be tackled with the right UBI program - best tailored to today’s consumers.

5 key components of a winning program

While reaping the benefits of a smartphone-centric UBI program (more on the benefits below), insurers can then adopt the four must-have components of a winning UBI program. 

1. Memorable user experiences

Ask: Are you building a program that your customers will actually want to use every day?

While pricing is important, insurers who offer exceptional experiences to their policyholders will see higher profitability, growth, and retention. 

This means partnering with the right Mobility Risk Intelligence provider to ensure frictionless adoption and use of UBI driving apps, while giving personalized feedback on driving behavior, vehicle maintenance, and emergency assistance - all via their smartphone.

Zendrive personalized driving feedback
Example: Driver feedback in app

2. Accurate programs powered by the right tech partners

Ask: Are you sharing behavioral and contextual data that’s insightful and accurate? 

In order to offer fair discounts, UBI programs must accurately analyze driving behavior. To do this, insurers can partner with big data industry leaders.

Mobility Risk Intelligence providers like Zendrive, for one, rely on AI and machine learning algorithms trained by over 200 billion miles of driving data. In addition to tracking overall mileage, Zendrive accurately scores drivers based on critical mobility insights like hard stops, harsh acceleration, speeding, phone usage, and hard cornering. Insurers can then provide a fairer price to their safer drivers.

What’s more, with access to millions of drivers via consumer apps, insurers can more seamlessly and cost-effectively acquire ultra-preferred risk and expand their user base.

3. A customer-centric approach

Ask: Are you meeting all of the specific needs of your customers? 

Instead of taking on a one-size-fits-all, cookie-cutter approach, ensure customer centricity via the right technology partner. Perhaps you want to seamlessly combine usage-based and behavior-based insurance (BBI) programs to offer a top-notch user experience, or introduce a try-before-you-buy solution.

Carriers should make sure their chosen technology partner works with them every step of the way to ensure UBI that caters to all customers’ varying preferences.

4. A reliable, predictive score that’s ahead of existing UBI scoring models

Ask: Is your score reliable, backed by quality, credible driving data?

The right UBI program will equip insurers with accurate, highly predictive driver and vehicle scores. Mobility Risk Intelligence providers like Zendrive, for example, offer a score that’s 6X more predictive of risk compared to industry-leading models (validated by Milliman). 

Undo Zendrive customer quote


5. Additional value-adding features

Ask: Are you offering even more features to keep your policyholders engaged and satisfied?

A winning UBI program will go above and beyond what’s been done in the past, delivering additional value.

This could mean offering safety features like collision detection and family safety (think: parents keep an eye on their teenage drivers), convenience-boosting features like claims automation, or fun loyalty features that involve gamification and rewards (i.e., a gift card to customers’ favorite stores) for driving safely.

 

Collision Detection App Zendrive
Example: Collision detection
UBI in-app rewards Zendrive
Example: Gamification and rewards program

Top benefits of smartphone-centric programs

We’ve said it earlier, and we’ll say it again: smartphone-centric programs, as compared to hardware-based programs, are the way forward. Why, exactly? 

Here are a few of the key benefits of smartphone-centric telematics programs:

  • Safety & accuracy: Smartphone-centric programs are safer in the sense that they provide crucial distracted driving insights that hardware devices cannot. Mobility risk intelligence providers like Zendrive measure phone use/distraction, detect stop sign violations, and offer automated driver coaching.
  • Cost-efficiency: Hardware devices that need to be installed in policyholders’ cars can cost insurers around $100+ per driver. As many drivers already have smartphones, insurers can leverage this technology for free by offering unique driving apps directly in smartphones.
  • Low friction: Hardware devices like Bluetooth beacons have made signup processes long and complicated, making customers reluctant and insurers unsuccessful in their UBI program rollouts. Smartphone-centric solutions are quick and easy to deploy.

  • High scalability: Smartphone-centric programs are highly scalable. Insurers can deploy solutions on millions of devices instantly, which leads to significant improvements in variety, volume, and freshness of data.

  • Better engagement & experiences: With the right solution, insurers can not only provide actionable insights around driving behavior to their policyholders, but also tie them to fun incentives and rewards like badges, streaks, and redeemable points.
  • Trustworthy: Providing consistent feedback to policyholders, and being right with their customers as a “digital witness” during a stressful event like a collision, can truly strengthen brand trust.
  • Holistic: Smartphone-centric UBI solutions help insure the vehicle, offering non-hardware-based vehicle tagging solutions, while also letting insurers better understand the drivers. This provides a more holistic program, versus a more siloed hardware approach.

Usage-based insurance amidst growing issues of fairness in risk scoring

Nowadays, the case for usage-based insurance has extended beyond advancements in technology, newfound access to data, and the ability to offer additional value-adding features.

While auto insurers have long relied on credit-based insurance scores, a scoring factor that has previously proved to predict risk, times are changing. Many US states have banned, or are in the process of banning, credit scores and other demographic data from being used in auto insurance scoring models. This is due to a growing call for more accuracy and fewer inequities in scoring. The way in which insurers have been measuring risk isn’t broken, but it’s inefficient and, at times, unfair.

The Consumer Federation of America found that drivers in the state of Washington who had excellent credit, but had been convicted for a DUI, paid $847 less in premiums than those with clean records, but poor credit. A 2020 NerdWallet analysis found that drivers with poor credit face 75% higher rates on average compared to those with good credit. These rates don’t reflect driving behavior.


NerdWallet credit analysis


Relying on an individual’s credit history, along with demographic factors like zip code and occupation, can introduce further inequities based on income and race. One in five Black people have a credit score below 620, compared to one in 19 White people, according to the Federal Reserve.

The case for UBI here is clear: The time has come for insurers to offer fairer prices based on how their policyholders actually drive, not based solely on their credit scores, age, gender, occupation, or town in which they live.

Why UBI, and why now?

So why implement a smartphone-centric usage-based insurance solution, and why do it now? 

For one, UBI leads to more fairly priced premiums, helping regulators fight growing inequities, and insurers quickly adjust to new regulations. UBI that relies on massive amounts of accurate data also lets insurers get more granular at, and thus improve, their risk profiling. Instead of grouping all drivers into one segment based on traditional risk factors, insurers can take advantage of critical mobility risk insights to more profitably measure and segment risk.

Second, as auto insurers face pressures to digitize and personalize their products to stay competitive in this pandemic era, the right UBI program helps insurers better serve and retain their customers. 

Ultimately, memorable user experiences and value-adding features, all offered seamlessly via a smartphone, can render the value of UBI stronger and clearer than it’s ever been before.


Learn more about Zendrive's usage based insurance solution here.

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