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SECTION I FUNDAMENTALS OF THE UBI MARKET Fig 1.6: State Farm still has a self reporting PAYD programme Source: State Farm Licence agreement signed by Thus, non-telematics UBI programmes use the similar statistical factors to assess the risk level of a customer. However, they levy the premium entirely or partly based on his / her actual mileage rather than as a fixed lump sum per annum. However, these insurers suffer from a number of drawbacks. AAAA. Reserved First, the odometer accuracy is affected by factors such as tyre size and wear & tear that can lead to errors in risk pricing. for employees of BBBB Such systems also generally rely on the customer’s honesty to calculate the periodic mileage but there is a clear conflict of interest for the consumer, which makes the system unreliable. In addition, there is a greater risk of fraud. For example, it is easy to imagine photographs of fake odometers. This make the system not easily scalable. The system does not gather any additional driver behaviour data that can be used for more accurate risk pricing such as the time of the day when the vehicle was driven, the type of road on which it was driven, the distance per trip, his/her driving style, etc. Strictly reserved to BBBB In a nutshell, because mileage is the most important variable in the assessment of risk, policies based on odometer readings represent a step forward in the analysis and the pricing of risk. employees. Distribution to third Finally, there is no opportunity for generating additional revenue through the sale of ancillary services. However, numerous other variables can also add risk-rating accuracy. This is what telematics-based insurance can deliver. parties is prohibited © PTOLEMUS - www.ptolemus.com - Global Usage-based Insurance Study - January 2016 - All rights reserved Strictly reserved for the internal use of the reader - Distribution to third parties is prohibited 72
SECTION I FUNDAMENTALS OF THE UBI MARKET b. Telematics-based insurance At the outset, most current insurance policies use static / statistical criteria to evaluate drivers' risks, notably age, gender, vehicle make & age, place of residence, occupation, etc. After a certain period in the relationship, insurers take into account the customer's historical claims profile, often called the No Claims Discount (NCD) status or the bonus-malus status. In most countries, this translates into a discount or excess. Licence Telematics insurance is a policy based on these 2 criteria and 5 new, dynamic parameters. Fig 1.7: The driving risk star adds 5 telematics components agreement signed by AAAA. Reserved for employees of BBBB Source: PTOLEMUS Consulting Group Strictly reserved to BBBB employees. Distribution to third Time includes the time of the day the drivers are on the road and highlights specific higher risk ranges for them to avoid. It also includes the average length of the trips highlighting potential fatigue and distraction issues. The distance travelled is still a primary factor in the UBI sector today and recognised as the most predictive factor. It is also a very simple way of explaining how UBI is fairer. parties is prohibited Place looks at the type of road, the type of traffic, the type of driving (urban or country lanes) and is often augmented with road attributes. © PTOLEMUS - www.ptolemus.com - Global Usage-based Insurance Study - January 2016 - All rights reserved Strictly reserved for the internal use of the reader - Distribution to third parties is prohibited 73
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