By Parikshit Yogananda
Usage-Based Insurance (UBI) is one of the recent innovations made by auto insurers that helps them in fixing the right premium for each policy they offer. This in turn helps them in managing their risks to a larger extent. Devices like odometers are used as an input for determining the driving behavior of applicants, which helps in fixing the premium. This can also be deduced using telematics devices, which are installed just like a deck in the vehicle.These telematics devices reduce the hassles faced by underwriters by providing ready information like miles driven, hard braking and sharp cornering for them to underwrite accurately. This information sharing, however, completely depends on the applicant’s willingness to share. Once that is done, the insurance company takes a decision on the premium accordingly. The information also helps in predictive analytics used by insurers and regulators alike.
The regulations segment of the UBI telematics is still in its nascent stage. Hence, there are numerous changes as well as talks going on, owing to the money in terms of claims that are at stake.
At the start, a device was used just to provide inputs such as the miles driven and time spent on road as to the “Pay As You Drive” concept. Presently, due to the technological advancements there is a lot more information as to ‘When, How and Where’ vehicles are driven. Thus, when regulators tried to regulate this data collection, it turned out to be more complex than they imagined.
Regulators will find it difficult to streamline the underwriting process based on the telematics information captured by third party devices. One more important challenge for the regulators is to make a system transparent for both the consumers as well as the insurers. Discounts in premium to consumers are provided from 1 to 30%, which requires complete transparency in the system to avoid conflicts.
The most important challenge for the regulator will be to make sure that insurers do not use telematics information as a pretext to fix premiums. If actualized in such a manner, then the statute might find it excessive, inadequate or discriminatory.
Conclusion
Research has predicted that there would be an increase of UBI by up to 70% by 2020 in the USA. Based on the above challenges, constraints and statistics, I would like to infer that there is a need for regulators to create a robust and transparent regulatory framework for telematics in UBI.
Regulators should try to take the technological changes in their stride while creating regulations. Also, as more and more insurers start incorporating UBI, there would be greater scope for the insurance industry to prosper on the whole. The progress can be attributed to lesser & clearer costs of insurance and an increased number of claim settlements.
