Rethinking the Case for UBI in Auto

Several well-meaning experts in this space have written about the unsustainability of usage-based insurance (UBI) programs due to high costs and low returns. They argue that, when you add up all of the acquisition, technology and administrative expenses, as well as premium discounts or other incentives, insurers would need to see a significant (read, unrealistic) decrease in loss ratios just to “break even.” I’ve seen figures as high as 25%. This line of thinking assumes that insurers are evaluating their UBI programs with the same criteria they use to evaluate any new business initiative, which is some variation of a return-on-investment (ROI) formula using future cash flow analysis and managing to a minimum required threshold set by the chief financial officer. Sound familiar? Optimally, the decrease in loss ratio will be supplemented by an increase in policyholder retention and market-share growth, which in time would allow you to manage to your ROI objective. However, by evaluating and measuring opportunity cost and leveraging other progressive metrics such as policyholder engagement, insurers struggling to grow their UBI programs should be able to get the continued support they need from executives to see their programs through to success. See also: Insurtech: How to Keep Insurance Relevant Setting UBI Up for Success The challenge with UBI is in building a large enough base of active policyholders over a long time (say, 3-plus years) to allow for meaningful measurement of the impact of loss ratio improvement. To offer perspective on this, I’m reminded of a well-made and still highly applicable argument made by Clayton Christensen nearly 10 years ago in the Harvard Business Review. His aptly titled 2008 article, “Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things,” argues that one of the most misapplied paradigms of financial decision-making relates to fixed and sunk costs. In most companies, managers are biased toward leveraging existing resources that are likely to become obsolete quickly, and therein lies the rub – the strategy group is often split from finance, when in fact the two should be fully intertwined and moving forward with the goal of ensuring the long-term competitiveness of the business. Because that’s not likely to happen any time soon in most organizations, what’s the next best alternative when you’re being challenged by your management team for continued justification of your UBI program spending? I’m going to give you a couple of ideas. First, measure the opportunity cost of not continuing to innovate and present market-validated data to back your case. You can accomplish this by researching and compiling data on future projections of declining auto premiums, shrinking demographics of traditional car buyers and rapidly increasing severity loss costs. CCC’s 2017 Crash Course report, for example, provides in-depth analysis of repair costs, telematics, casualty trends and myriad other factors that contribute to the performance of the industry. Other research you can leverage includes the success stories of national UBI market players via their annual reports, as well as recent research from analyst firms and reinsurers on the proven business impacts of telematics over time. To quote Christensen again in the above-mentioned article: “The projected value of an innovation must be assessed against a range of scenarios, the most realistic of which is often a deteriorating competitive and financial future.” I think that pretty much speaks for itself in terms of the potential value of moving your UBI program into high gear. It took less than 10 years for 95% of insurers to adopt credit-based rating variables, and there is no reason to think that the adoption of driving behavior variables via telematics should be any different. Second, focus on a shorter-term performance metric that is easy to measure and highly important on one or more long-term traditional metrics. A good candidate for this is customer engagement, measured simply as the number of times a UBI participant interacts with your mobile app or web dashboard on a monthly or weekly basis. This metric has been proven to have a direct correlation to higher retention and increased customer lifetime revenue. In fact, CCC’s case studies with its telematics customers have shown an average increase of 30% in retention rates for UBI policyholders vs. non-UBI policyholders, with consumers interacting an average of 2.4 times per month via mobile. See also: Is Usage-Based Insurance a Bubble?   To ensure continuing success in your program, you’ll want to determine which high-impact motivators are most successful in driving customer engagement. The ability to do A/B and multivariate testing in pilots or soft launches is key in helping you rapidly and effectively find which motivators are most effective for the segments you are targeting. Open telematics platforms that allow you to easily set up and administrate these types of tests via a user-friendly web interface is critical here. Furthermore, having the flexibility to rapidly test market sentiment among your agents across various segments of your business can yield greater insight and allow you to maximize your participation rates and Net Promoter Scores. By seeking out and finding valuable metrics to support traditional innovation business cases, you can help win the internal support you need to continue to scale and grow your UBI program. At the end of the day, you simply can’t afford to be anything but a  first-string player in this high-stakes game.