Canadian Underwriter

Commoditization of usage based insurance offerings taking place

May 30, 2014   by Angela Stelmakowich, Editor

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The current regulatory environment is fuelling commoditization of usage-based insurance (UBI) offerings, something that could be at odds with how open consumers are to exploring different options, Colin Wright, principal of Corner 2 Consulting, suggested during a presentation Thursday.

“Because of the constraints from the regulator and so on, I think we’re starting to see somewhat of a commoditization of UBI offerings,” Wright told attendees to the Insurance Telematics Canada 2014 event in Toronto. “In Ontario, for example, those options are all very similar and they’re all targeting the same market niche,” he said.

UBI is definitely growing in potential, Wright said. “Real-world driving data really has to be more predictive of risk than is dated boxes,” he told attendees. “I also believe that UBI will be used to price most or all of the auto insurance market – and, hopefully, sooner rather than later – because it is a more accurate, fairer and more equitable way to price auto insurance risk.”

That said, “regulation and market realities pose limitations on the strategic prospects that are available,” he argued. “Innovation in delivery and products, I believe, is the way forward.”

But that demands advancing – taking advantage of the technological innovations that have been made over the last few decades – and moving forward in line with consumers wants. Wright cited a Towers Watson survey, released in April, that found 94% of respondents would be receptive to purchasing UBI auto insurance policies if they were guaranteed their premiums would not rise.

“I think that builds on what we learned,” said Wright, who previously managed Aviva’s Autograph program, starting in 2008. Though the product did not ultimately go to market in Quebec, a survey around that time indicated about two-thirds of respondents would think of buying the product.

“I think as important as the magnitude of the positive response was the fact that we learned the marketing was important. So age, gender, socioeconomic status, geography – none of that was really important. The appeal of this product crossed those boundaries, which was a real eye-opener for us because our belief up to that point was that UBI was a product best suited to a young market and possibly best suited to some techno geeks,” he said. “We discovered it had broad appeal and anybody would be interested.”

Initial costs and the need to market may make UBI “a better fit as a direct play,” he said. “Realistically, to launch one of these programs, to launch it successfully, and get the kind of traction we want to get in investment, you need to make an incremental spend in terms of advertising.”

There are lessons to be learned in both the Towers Watson and Aviva survey results, Wright suggested. “What this tells me is I think the public is well out in front of the industry, policymakers and regulators in terms of their willingness in terms of different products, and UBI in particular,” he said.

One downside, though, is that Canadians seem quite comfortable with regulation. “It’s a bit unfortunate because I think we should be really pushing our regulators to move forward on this a little more quickly,” Wright told conference attendees.

“It’s really a crawl before we walk approach as opposed to a walk before we run approach. Let’s be realistic here. It’s a very, very measured and deliberate approach to regulating UBI,” he said.

For most of the country – although not Quebec – there is a discount only, no surcharge environment, “which really constrains the design of the product and how it can be brought to market.”

Beyond product variety, Wright recommended instilling some level of immediacy, something that was proposed as part of the Autograph product. There idea there was to “continue to provide the product with a six-month renewal basis only, because we felt that the immediacy of a return, of getting a discount, would be important to the success of the program.”

His view is that Canadians have already accepted they are willing to make a trade-off with regard to privacy, by providing some personal information, “in exchange for material benefit.” As such, regulators “need to catch up with the public.”

Although not an opinion shared by all, Wright said he believes “auto is a commodity product and commodities sell on price. So your strategic option is pretty obvious; it’s cost leadership. You’ve got to drive costs down in order to eke out an advantage over your competitor.”

UBI is a strategic play, Wright said. “We should always remember that the overarching purpose of any strategy is to gain sustainable competitive advantage. Sustainable may be difficult, but we should at least be inspiring to competitive parity,” he said.

“I think there’s no case to be made for sitting on the sidelines with respect to UBI,” Wright emphasized.