Ditch the Onboard Device, But Not the UBI Model
Jake Diner | June 06, 2014
Here is a typical onboard diagnostic device UBI business model.
An auto insurer decides to get into the usage-based insurance game in 2013. The insurer partners with a reputable telematics consultant/data bureau that requires a $250,000 start-up investment. On top of that $250,000 investment, the insurer is required to purchase a minimum of 3,000 onboard diagnostic (OBD) devices at a cost of $200 each from a telematics services provider. Now the insurer is facing an $850,000 UBI price tag, and that doesn’t include the costs of marketing the program.
Flash forward one year: The insurer has 500 policyholders enrolled in their UBI program. However, out of the 500 UBI devices shipped to policyholders, only 300 have been installed in policyholders’ vehicles. Meanwhile, the insurer has not been able to accumulate enough driving data to draw any actuarial conclusions. Furthermore, the insurer has not experienced loss ratio improvements or gained a good understanding the UBI program dynamics, except for the fact that it is not generating a return.
The Root Cause of UBI Failure
The purpose of UBI is to promote safe driver retention, lower loss ratios and improved profitability. These goals sound good on paper, but they are yet to be realized by most insurers. The biggest problem? It requires a massive improvement in loss ratio to offset the upfront seven-figure UBI investment and significant logistical effort.
Fortunately, it doesn’t require an actuary to discern that the root cause of massive expenses and market adoption issues can be traced back to one major flaw in the business model—the OBD device.
Six Insurmountable OBD Challenges
- OBD Cost (device, fulfillment, inventory management, replacements due to wear and tear): With devices costing up to $200 each and minimum quantity requirements, the initial investment is steep. Add in the costs of device warehousing, fulfillment, and inventory management and it’s easy to see how UBI programs can turn into costly management nightmares.
- Vehicle usage/ compatibility/interference: First, there is the waste issue outlined in the typical business model above. A large percentage of those who receive the device never plug it in. Next, OBD devices are not compatible with any hybrid or electric vehicles or with most of the Jeep Cherokee lineup. This means policyholders with those types of vehicles may not be eligible for your UBI program. Finally, policyholders who do plug in the device may soon discover it interferes with the vehicle’s electrical system. After all, the CAN-bus that the device plugs into was built for short-term diagnostics, not continuous vehicle monitoring.
- Insured inconvenience: Why is there so much device waste? Because customers don’t really want to crawl under their dashboards to install a small black box in their car. It’s inconvenient and it may be technically intimidating for some. And if the device causes mechanical issues, the policyholder experience with your brand is forever marred.
- Data quality, transmission and analysis: The data collected by OBD devices is not as accurate as needed to serve as a foundation for pricing decisions. Among other challenges, the data is not time stamped so if confusion arises, there’s no way to reconstruct the sequence of what actually occurred and differentiate errors. Data must be transmitted to the insurer at a typical cost of up to $5 per device, per month. And, the data is usually raw and unscored, so the actuarial and underwriting departments can’t actually do anything with it until methodology and algorithms are developed or another consulting firm used. Finally, there’s no way of knowing where the device has been unplugged so only partial fraud is detected.
- Driver engagement, trust and opportunity for improvement: The whole point of UBI should be to teach policyholders to become better drivers and then reward them with lower rates when their driving improves. However, with the OBD model, drivers can’t see what you’re measuring or how they’re performing. There is virtually no opportunity for improvement. In an age when consumers demand transparency, the “black box” stands between you and your insured and can create a serious trust issue.
- Speed to market and scalability: Most insurers that have attempted to roll out hardware-based UBI programs have required two years or more for implementation. What company has time for a two-year rollout? The market is moving fast. In two years, supply, demand and competition can all change drastically.
Ditch OBD—Not UBI
Today, the typical UBI scenario is far from successful. However, there’s no need to throw the baby out with the bathwater. UBI programs still offer great potential. Like all worthwhile ventures, the industry has a huge opportunity to learn from its mistakes and to emerge stronger with a second-generation offering.
The key is to ditch the OBD device that saddles UBI programs with massive overhead costs and logistical challenges.
Smartphone UBI technology has now been tested and proven to overcome every one of the six OBD challenges listed above at a much lower cost and in a significantly shorter timeframe. Furthermore, new smartphone technology overcomes early mobile UBI shortcomings. Now, insurers can offer their policyholders a completely hands-free solution that does not cause excessive battery drain. Innovative auto-calibration allows the smartphone app to work anywhere with no fixed position or special holder required. A driver can literally leave the phone in a purse and doesn’t have to turn the UBI app on and off because it includes sophisticated automatic trip detection technology.
Closing the Gap
Mobile technology makes the UBI opportunity a lot more interesting for small and regional insurers that have not yet entered the UBI market, and for bigger players that haven’t gotten UBI right yet. It’s only a matter of time until all insurers ditch their OBD devices and replace them with a lighter, more nimble mobile alternative.
The mobile UBI race to market share is just getting started. Now is the time to close the gap and defend your company against adverse selection.
(Jake Diner is the co-founder and CEO of Driveway Software. Driveway is a smartphone-deployed, cloud-based technology that provides auto insurers with comprehensive insured driving data for better pricing intelligence. To learn more, visit http://www.drivewaysoftware.com)
- Race to the Finish Line
- New Tools, New Opportunities in Claims
- ITA LIVE: Reaching Insurance Industry Crossroads
- Advice to Insurance IT Leaders: Keep Your Eye on the Ball
- New Date, Venue for ITA LIVE 2017
- Guidewire Makes Major Push to Small and Midtier Market by Acquiring ISCS
- Insurance Disruption is Happening Right Now
- Insurity Adds Strategic Investment Partner, General Atlantic
- Beyond Transformation: The Convergence of Finance, Risk, and Actuarial Functions
- The Rapid Evolution of Consumer Protection Regulation
- Talent Hunt: Finding, Attracting, Retaining Top People
- Insurers Flexing Their Distribution Models
- Technology Driving Disruption in Insurance
- Fear of ‘Next Bubble’ Challenges Life, Annuity Carriers
- Technology Allows Commercial Lines Insurers to Stand Out
- Single Sign-on Viewed as Biggest Tech Challenge for Agencies
- ISCS Observes 20th Anniversary; Scurto Predicts Major Changes Ahead
- Policyholders and Their First Impressions
- Progressive Making Progress on the UBI Front
- High and Dry: Insurers Search for Disaster Recovery Plans
- Insurers Sign The (Un)Dotted Line
- Reflections of a Retired Insurance CIO
- Mobile Device Management Just One Answer to BYOD Issue
- Lessons from GEICO and Progressive on Winning the Critical Buying Stage
- You Are a Target for a Cyber Attack
- Web-based Systems are the Next Evolution in Claims Technology
- Gaining a “Wow” Experience from Web Users
- Time to Shift from Business/IT Alignment to Business/IT Alliance
- Healthcare Insurers Changing to Consumer Model
- Organization is the Key for Selecting Software Vendors
- Analysts Expound on the Needs of the Mid-tier Insurance Market
- Finding the Cure for Obamacare’s Website
- New Software Solutions Benefit Insurers on the Inside and Outside
- Products, Market Impede Investment in Systems for Life Insurers
- Combatting Cyber Threats: Predict, Prevent, Persist
- The Future of Telematics Heads Beyond Insurance
- The Shame in Cyber Security Lapses
- Building Policy Administration Systems for the Future
- Insurers Look Into The Eyes of Their Policyholders
- It’s a New Dawn for the ITA
INSURANCE IT NEWS
- Adaptik Named Among Best Workplaces 2017 List
- Guidewire Launches Accelerators to Meet Consumer Applications
- New Platform Enables DRC Customers to Conduct 6,000,000+ Ratings an Hour
- Roost Unveils Next Gen Smart Home Products
- MetLife Auto & Home Offers Digital Products via Guidewire
- Solartis Releases Rating Micro Service with ISO Electronic Rating Content
- Majesco Announces Digital Engagement and Microservices Platform as a Service
- Franklin Mutual Adds Roost Home Telematics Solutions
The Email Chat is a regular feature of the ITA Pro magazine and website. We send a series of questions to an insurance IT leader in search of thought-provoking responses on important issues facing the insurance industry.
ITA is pleased to present the 2014 Webinar Series. We have many topics for you to choose from and attendance is open to all ITA members. The webinar topics are current and exciting — ranging from predictive analytics to telematics and will focus on the direction insurance carriers need to follow for the future. All webinars are presented by insurance IT professionals along with some of the leading analysts and consultants in the field. There is no cost to attend an ITA webinar. For more information and to register for the webinar, click the “title” of the webinar below.
BLOGS AND COLUMNS
Robert Regis Hyle
Insurance has gone through several business and technology cycles in the last two decades and with the infusion of not just insurtech tools but with... READ MORE
The whole transportation sector is in for massive transformation. The way people and goods will be moved from point A to point B in the future will be... READ MORE
You have surely heard it said that small businesses are the growth engine for America. Today, the phrase has a special ring to it for benefits... READ MORE
With stagnant growth and lingering low interest rates, the life insurance industry faces a challenging future... READ MORE
Finding insurance carriers willing to write commercial lines risks has always been a challenge for producers... READ MORE
As Guidewire Software prepares for the start of Connections, its 11th annual user conference that begins on Nov. 2, Brian Desmond, chief marketing... READ MORE
The core systems replacement cycle is speeding up. Twenty years ago, even if you spent your entire career working at the same insurance company, you... READ MORE
- Partner News