Is UBI the COVID-19 Economic Cure for Auto Insurance?
I recently posted a short article about the dramatic impact that COVID-19 restrictions are having on auto accident frequency. Last week several auto insurers introduced plans to proactively refund money or provide credit to policyholders reflecting the dramatic reduction of accident rates. Considering those announcements, several people have asked whether telematics-based products automatically adjusted to the changes in exposure. The only purpose of this post is to answer that very specific question.
Telematics-based products come in many shapes and sizes. Understanding the difference between types of programs is a key to answering the question at hand. For the purpose of this article, I am going to broadly categorize telematics-based policies as follows:
Short-term usage-based insurance
Continuously monitored usage-based insurance
Pay-per mile programs.
Telematics sensors can track how, how much, when and where the vehicle is being operated. There are differences--even within each of the categories--as to what driving behaviors are collected and used for determining risk. The focus during the crisis has been on the significant reduction in miles (i.e., how much) because it intuitively has a major impact on risk. Miles driven is a prominent and standard factor in all telematics programs. However, other driving behaviors (e.g., where and when) have also undoubtedly changed during the crisis and impact the risk of having an accident. There is less consistency in the usage of those other factors across the programs.
Short-term usage-based insurance policies (e.g., Progressive’s Snapshot program) track driving patterns for a limited time period to establish a telematics-based discount that will be applied even after the monitoring is stopped. If the monitoring period was completed before the crisis started, then the premium would not have automatically adjusted for the different driving patterns during this crisis. Interestingly, insurers with these types of products need to be careful about any new policies for which the evaluation period includes this period of “abnormal” vehicle usage. If these insurers set a telematics premium based on driving patterns that don’t continue post crisis, those policies will be mispriced (most likely underpriced).
Continuously monitored usage-based insurance policies (e.g., State Auto’s Safety 360 program) track actual driving behavior as long as the customer continues to be covered by a usage-based insurance policy. Typically speaking, these insurers use the driving data collected in one policy period to determine the appropriate premium for the next policy period. In other words, the insurer is assuming the behaviors exhibited in one period are indicative of what will happen in the next. As such, any changes in driving behaviors during this crisis will automatically impact the premiums for the next policy period. Furthermore, if driving patterns return to normal post crisis, the following policy period premium will adjust back to normal.
If you aren’t a “picky actuary-type”, you can skip to the next paragraph. For those of you who are, here is a quick caveat applicable to the last paragraph. Insurers are required to send the renewal offer in time to meet state-by-state renewal notice requirements. As such, they cannot practically use the driving data from the end of one policy (e.g., the last 45 days) in the determination of the premium for the next policy. Therefore, a six-month policy that renews on April 15 may not include the lower risk driving that occurred between March 1 and April 15 and won’t fully adjust automatically.
Pay-per-mile programs (e.g., Metromile and Noblr) break the premium into fixed and variable components. The current month’s variable premium fluctuates based on actual driving data from the prior month. If a customer has one of these programs, the variable premium will automatically adjust to reflect the actual reduction in miles driven during this crisis. Noblr’s auto program would also respond in real-time to changes in risk for other changes in driver behaviors. Jason Foucher (Noblr co-founder and CPO) informed me their customers’ premiums are, on average, 55-65% lower during this time depending on the state, which is based on Noblr drivers with prior insurance not driving at all versus 1,000 miles per month.
I am a firm supporter of telematics programs as a fairer and more accurate way to determine premiums and understand that each of these “types” of telematics products have their strengths. However, if you want to know which type respond automatically and most quickly to the crisis, the answer is pay-per-mile programs.