In all fairness, car insurance is a complicated legal agreement by which you put a future risk in the courtyard of another party. Should the risk materialize, that party is supposed to protect you from certain bad consequences. But each case is special and each person’s insurance needs are different. This is why you need the support of a professional who knows the insurance contract and can advise you for your best interest. But if the middleman’s interest is not the same as yours, things get complicated.
This is where telematics come into play. A small equipment (similar to the “black box” on a plane) into your car can record straight acceleration, angular acceleration and deceleration data, beside speed and location. Why is this a good thing for drivers? Based on each driver’s data and style of driving, the insurance companies can personalize unique car insurance offers (usage-based insurance or UBI) And why this is good for insurers? The margins in this industry are already shrinking due to heavy competition. Then, the unavoidable advent of the autonomous car will change the perspective on who bears the liability (the car owner? the passengers? the machine?) .By 2030, semi and full autonomous vehicles will reach 380 million worldwide. The paradigm shift for insurers will be from carry and cure the risks to care about the risks.
So how does this UBI work? While there are hundreds of service and technology providers, there are different approaches among insurers.
PAYD or PHYD?
One way is PAYD (Pay As You Drive) – the premium is based on the mileage sent to the insurer by the “black box”. Sometimes, the insurer takes into account the location and the time of driving.
The other way is PHYD (Pay How You Drive) – meaning that your premium evolves with your style of driving. The telematics system tells the insurance company several driving factors in real-time (acceleration, speed, braking, night-time driving, distance etc.) then the insurer combines this data with the driver profile, providing a unique premium for each driver.
After a mass-adoption of UBI, car insurance premiums will decrease significantly. First semi-autonomous cars are expected to hit the market in 2020. That is in 4 years from now. To have an idea of incoming trends, consider that in Germany UBI premiums are expected to decrease by 40% during 2020–2030. Now expand this trend of relying on telematics rather than on actuaries to other risk areas (home, sports, life etc). An app recording your driving style as well as your life style for your insurer sounds like a dream? It will be reality soon.
Author: Lucian Vinatoriu