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Rating and Pricing Usage-Based Insurance Offers Actuaries Unique Opportunities

04/14/2010 — CHICAGO, March 16 -- As usage-based insurance (UBI) gains momentum among major auto insurers, actuaries have an opportunity not just to rate and price a product but to affect peoples’ lives, attendees of the Casualty Actuarial Society (CAS) Ratemaking and Product Management Seminar were told.

Robin Harbage, senior consultant, EMB America LLC, explained that usage-based insurance uses driving data collected from telematic devices that allows auto insurers to determine more accurate rates while also empowering customers to control these rates.

Unlike traditional auto pricing models which rely on information such as gender, age or marital status, usage-based insurance allows insurers to pull information through the entire policy period and analyze an insured’s loss cost potential based on how they use a vehicle.

“This enables insurers to determine a much more accurate price,” Harbage said.

At the same time, insurers have an opportunity to provide feedback to the insured and tell them how they’re doing with their driving. “Hopefully you’ll have a much better driver at the next cycle based on what you told them and the insured has the opportunity to do something they’ve never done before – control the rate.”

Harbage observed that usage-based insurance affects the role of actuaries because it enables them to do more than set a rate.

“As actuaries, for the first time you can feel differently about your jobs because you’re not just setting rates and charging for insurance. You’re truly doing something that could affect peoples’ lives and maybe even save a few,” he said.

While only a few auto insurers in the United States currently publicly sell UBI products, many are using telematics to verify miles driven, measure driving habits for rating, and/or provide safety services.

A significant advantage of usage-based insurance is a reduction in auto accident frequency through monitoring and behavior modification, which will lead to associated insurance discounts for a majority of drivers, not just those with low mileage. On the other hand, there are some obstacles related to UBI, such as ensuring consumer privacy and establishing ownership rights to the collected data.

Pamela Kramer, general manager, GreenRoad, noted that there are a lot of parallels between the public’s perception of driving behavior technology and online banking and financial services.

“It’s understandable that people have questions about where the data goes and how it is used, but what they don’t realize is that if they have an automated toll tag in their car or use the GPS on their phone, they’re already being measured on speed, location and certain other variables,” Kramer said.

The challenge is how to make the technology optimal for consumers and at the same time help insurers make it a viable business. “The information we collect is as sensitive as any type of personal or financial information. The important thing is to take this technology and use it to create both better drivers and cost savings,” she observed.

Kramer went on to note that by measuring and improving driving behavior, GreenRoad positively affects not just driving safety, but fuel economy, carbon emissions and overall vehicle operating costs.

“GreenRoad customers typically reduce crash costs by up to 50 percent and reduce fuel usage and emissions by up to 10 percent. Our mission is to make roads safer and greener,” she said.

The Casualty Actuarial Society fulfills its mission to advance actuarial science through a focus on research and education. Among its 5,100 members are experts in property-casualty insurance, reinsurance, finance, risk management, and enterprise risk management.

Contact Information

Mike Boa, Director of Communications and Marketing

703-276-3100, mboa@casact.org

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