Obstacles to Implementing UBI
The challenges to UBI implementation fall into two distinct categories. They require the insurer to either create a hardware and software system for gathering and processing information, or one has to be bought. In the second case, it is necessary to overcome customer objections, privacy concerns, and a bevy of third-rate crime dramas that are going to use usage-based monitoring as a plot device.
For the insurer, there is the need to set up the infrastructure of a system that gets people to plug in little devices, collects that information securely in a data warehouse, and then applies the knowledge to policy discounts and risk profiles. This is typically done by using a whitelabled product that already has most of the nuts and bolts in place, given that starting from the ground up would get you into trouble with people who have already patented all the obvious processes and licensed them to a cabal of vendors.
There are, of course, insurers who will go for the high risk driver because there is more money to be made on premiums. They often promote UBI and pay as you drive systems differently as “insurance for people with a few tickets or accidents” (or high speed pursuits, bath-salts induced carjackings, or accidental forays into occupied residential structures with a dumptruck full of stolen copper wires). The proposition for these drivers is that if nobody else will insure you, and you don’t want to deal with the crazies on the bus or on the train, then you have to submit to the whims of the insurance brokerage.
Customer Adoption and Objections
The second big challenge for UBI is the customer. Some people are concerned about the privacy implications, and don’t like the idea that your insurer knows exactly where you are going, and how long you are staying there. The police and litigants can subpoena this data if there is a crime or civil case. Certainly, you could argue that you would only object if you have something to hide, but what if you want to keep the option open and prevent your spouse from knowing that sometimes you stray and spend a few hours at the spa with sliced cucumbers covering your eyes, and you don’t want people to find out and revoke your man card. If you are one of the several hundred people I see every day on the 101, then you might also object to a system that notices you driving 13 miles an hour over the speed limit. Sure, the devices say that they aren’t making a comparison to the road’s posted speed limits (yet) but if the top speed limit in your state is 70 miles an hour and you are going faster, then your insurer is going to see you as a bigger risk.
The reward to overcoming these challenges is that you can finally get adverse selection to work in your favor. Bad drivers will gravitate toward policies that don’t use monitoring. Privacy advocates will have to “put up or shut up” and will pay more to stand on principal. The overall risk pool of the customer base will shrink, leading to lower reinsurance costs (that’s right folks; the insurance company has to buy insurance in case all of its customers file claims at the same time) and making the shareholders happy. There is a very big reason that usage-based policies and plans are referenced in quarterly and annual reports as a source of revenue.