Ditch the Onboard Device, But Not the UBI Model
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)