Why Usage based Insurance (UBI) should be offered by Indian Insurance companies?

Usage-Based Insurance (UBI) is an innovative system of assurance that aligns driving behaviour with premium rates for vehicle insurance. Mileage and driving behaviours are tracked using telematics devices that are installed in a vehicle or have already been integrated during manufacturing.The basic idea of integrating telematics with vehicle insurance is to get driver's behaviour monitored directly in real time. These telematics devices measure a number of parameters like miles driven, time of day, where the vehicle is driven, rapid acceleration, hard braking, hard cornering, and air bag deployment. The level of data collected depends on the telematics technology used and the willingness to share personal data. The insurance company then assesses the data and charges insurance premiums accordingly. For example, a driver who drives long distance at high speed will be charged a higher rate than a driver who drives short distances at slower speeds. With UBI, variety of business models can be launched by insurance companies which will be beneficial to insurers and consumers.

The pricing with UBI deviates from that of traditional vehicle insurance. Traditional insurance depends on historical data to produce rating factors that include driving record, credit-based insurance score, personal characteristics (age, gender, and marital status), vehicle type, vehicle use, previous claims etc.

Premium discount on traditional vehicle insurance is usually limited to the bundling of insurance on multiple vehicles or types of insurance, protection devices (like airbags) and driving courses. Policyholders tend to think of traditional vehicle insurance as fixed cost that is assessed annually and usually paid for in lump sum on an annual basis. However, studies show that there is a strong correlation between claim, loss costs and mileage driven. For this reason, many UBI programs seek to convert the fixed cost associated with mileage driven into variable cost that can be used in conjunction with other rating factors in the premium calculation. UBI has the advantage of utilizing individual and current driving behaviours, rather than relying on aggregated statistics and driving records that are based on past trends and events, it makes premium pricing more personalised and precise.

UBI programs offer many advantages to insurers, consumers and society. Linking insurance premium to actual individual vehicle or fleet performance allows insurers to more accurately priced premium. This increases affordability for lower-risk drivers, many of them are also lower-income drivers. It also gives consumers the ability to control their premium costs. Insurer needs to incentivise them to adopt safer driving habits. Safer driving also helps in reducing accidents, congestion, and vehicle emissions.

The use of telematics helps insurers to accurately estimate accidental damages and reduce fraud by enabling them to analyse the driving data. This additional data can also be used by insurers to have more differentiating UBI products. Additionally, the safety benefits offered with many telematics UBI programs also helps to lower the number of accidents and vehicle theft related costs by improving accident response time, allowing for stolen vehicles to be tracked and recovered, monitoring driver safety etc. There will be improvement in customer support and its users will receive proactive responses from the company.

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