Is it Time for Usage-Based Insurance for Vehicles in Indian Market? A Critical Analysis

Most car owners in the current state of the market are content with buying the simple third-party insurance or a comprehensive insurance that covers damage to the vehicle, usually with a significant number of exclusions.

Most new types of cover are not yet known to many consumers, or those policyholders who tend to go ahead with the traditional means of insuring a vehicle. In fact we could go so far as to say there is a premium fixation in the market: the India Motor Tariff.

It has the effect of a ‘one-size-fits-all’ approach and it may not take into account the realities of the market. Even though insurers have the freedom to fix prices, insurers have been happy to follow the tariff and compete with each other on other types of price discounts (such as dealer discounts) and extra coverage. There has been a debate on why the government has not deregulated the third party element of the cover, as it has already done with the ‘own damage’ element.

Low adoption of add-on coverage

It’s likely that deregulation would raise innovation in the market and there is still a long way to go with evolution of products and technology in the motor sector.

General Insurance Council (GIC) figures show that out of around 190 million registered vehicles in India only 83 million had third party insurance cover in 2015-16. Figures from the GIC yearbook show the extent to which non-life insurers are struggling to generate operating profits, and the need to move away from an ‘asset-driven’ approach to a more ‘risk-driven’ approach.

In India net incurred loss ratios tend to be high and policy pricing is currently standardised by groups of driver types. The benefit of no-claims in a year is passed on in the form of a fixed discount on the premium at renewal.

Insurance plans that offer cover with things like zero deduction for depreciation, and inclusion of certain auto parts (which are normally excluded), are yet to find wider acceptance.

There is relatively little understanding amongst consumers of extras like: zero depreciation cover, engine coverage (including water damage caused by extreme weather or other consequential loss), spare key coverage, personal accident cover, ambulance and medical expenses cover, vehicle replacement cover or rental reimbursement.

Most insurers are still in the process of educating consumers about these types of add-on coverage. For insurance companies what matters most is efficient risk pricing, not just growth from innovative product features.

Meanwhile motor insurance forms about 45% of the total business of non-life insurers in India. The incurred claims ratio in motor insurance – defined as the ratio of paid claims to premiums collected – was at a high of 77% in financial year 2015. Clearly such a high ratio represents a major cost for the industry, leaving the market ripe for new technological advancements that lead to more accurate pricing of risk.

Whilst we see new motor cover options struggling to attract interest from consumers, there are some much more exciting developments coming in the next few years.

Usage-based insurance heading for India’s personal motor market by 2020 

Telematics technology that enables usage-based insurance pricing is catching on in several countries notably the US, Australia, Italy, the UK and other parts of Europe, and its take up rate is accelerating. Telematics – working through the vehicle’s GPS and cellular connection – allows insurance companies to monitor a driver’s behaviour on a real-time basis and bring the premium in line with the behaviour of the driver.

One major forecast has estimated the number of consumers opting for UBI will grow to 100 million globally by 2020, reaching 50% of all vehicles on the roads by 2030. According to a 2016 survey by Ptolemus Consulting Group, India will be among the countries where UBI will be launched in personal motor insurance by 2020.

With usage-based insurance, in-vehicle telecommunication devices (either an installed black box, smartphone app, OBD dongle or embedded telematics) are installed to gather real-time data. The behaviour of the driver – such as kilometres driven, GPS location data, any rapid acceleration, hard braking and at what time of the day a vehicle is driven – all relevant information to insurers is captured real-time. The data is analysed and risk scores are determined based on the analytics results.

Almost 50% of drivers in our LexisNexis Risk Solutions survey had sought a UBI policy, but only one in five of them were actually given the option of this type of cover. This suggests a huge opportunity for insurers willing to take the leap and embrace telematics-based motor insurance.

Additional benefits to the policyholder from UBI can include:

  • Monitoring of driving style can coach the driver, delivering incentives (points or policy discounts), reducing the number of accidents
  • Supplying crash diagnostics and triggering emergency assistance in the event of an accident
  • Lower premiums (especially for younger drivers or other riskier drivers)
  • Driver identification for multi-driver vehicles
  • Stolen vehicles tracked and recovered
  • Car fleets can determine the most efficient routes and cut speeding fines
  • Driver alerts and partnerships with other vendors for saving costs on fuel and maintenance.

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