Differentiated Pay-how-you-drive solution for insurers

The European Court Decision on gender-based pricing has resulted in much industry debate with many insurers fearing the ruling will harm those that it aims to protect the most. However, are there opportunities for insurers to do things differently – to turn an uncomfortable and potential costly change into a source of profitable growth opportunities?

Simon MacDonald, Sales Manager for SSP African Operations, says the solution may lie in a differentiated pay-how-you-drive, equality-pricing solution as in the long run insurers will need to consider data other than demographic data to underwrite.

He says non-physical, criteria-based risk profiling willgradually become a requirement so insurers must start to change the metrics they are collecting to define accurate prices.

“Using telematics or pay-how-you-drive technology, an insurer can provide driving profiles in real-time to a dashboard for each policyholder’s driving type and style and develop predictive tiers or risk grouping linked to the likelihood of a driver incurring a loss,” says MacDonald.

The real-time capture of data can then be used to decide whether a policy should be increased, decreased or cancelled based on the policyholder’s driving behaviour.

He believes this analysis and update would result in higher quality and more profitable business as risks are better assessed and transparency is provided to the driver on their driving patterns. For women drivers this approach could be a good way to assess their driving skills based on “how-they-drive” and eliminate the gender factor which is now considered unacceptable.

MacDonald believes the pay-how-you drive approach will help reduce current potential subjectivity around data collection and analysis. “If information can be captured in real-time on the drivers’ driving patterns this can then be processed to adjust premiums in real-time and help insurers make decisions on whether to keep or cancel a policy, advise the drivers ona better driving approach or on how to avoid specific locations more prone to accidental claims.”

Data captured should include mileage, speed, dates/times of use, directions driven, length of driving license, type of car driven, day vs night, good/bad weather conditions, brakes, acceleration and corners as well as other behavioural patterns – start/stop, type of journey made, etc. “This data can then be used to develop underwriting guidelines,” says MacDonald.

Once the risk profile has been determine and selected, insurers can focus their attention on the risk pricing which needs to be aligned to the new innovative telematics-based products that are launched.

He says there are different modelsto considerto drive rating speed and rating accuracy. Some will require that rating steps be developed as part of the product development activities, others may consider externalising the rating process to drive responsiveness and speed. Whichever decision is taken, pricing consistency is important across channels. “We find that the broker channel will still face challenges in this new world with accessing accurate quote information within the required lead time.However, there are a number of options that can be considered to facilitate interactions between the insurer and the broker.”

The first of these, MacDonald says,is to enrich the broker data with external data and send it back to the broker utilising something like SSP’s Real-Time-Rating component which is used in the UK could be localised for the South African Market. “This component is a distribution-based offering, which enables an insurer to utilise third party data in real-time at the point of sale to refine individual risk pricing and reject less favourable risks,” he says.

Another is to locate the quote engine in the insurer’s office and enable the broker to update the data once done. “This approach offers insurers the opportunity to use their own rating engines and just receive customer input data to pass into those engines and then return a quotation.”

A third option is to locate the quote engine in the cloud or a centrally-hosted quotation solution. This approach considers the decoupling of the quote engine from the broker office. The quote engine resides in a centrally-hosted environment, the SSP Quotation Hub/ or cloud, where rates can be updated on a regular basis with no constraints on the broker technology, which is currently deployed in the UK could also be localized for the South African Market.

Finally one can consider Cloud-Based-Real-Time Pricing. This approach enables rates to be calculated in real-time through a number of channels beside the broker channel using a quotation filtering engine. These channels include the direct channel, the aggregator channel as well as affinities and bancassurance channel.

“The ability to innovate in product development requires extensible rating models (and the systems in which they are built and instantiated) to be flexible enough to accommodate entirely new elements, not just changes in value of current elements. The importance in flexibility of product design is not only important to launch pay-how-you-drive products today but also new products based on the other criteria mentioned above age andweight tomorrow,” says MacDonald.

“Technology enablers such as those presented above can lower underwriting expenses, reduce losses, increase premiums where premiums need to be increased, and improve the premium/risk relationship. International research estimates that taken togetherthese changes could reduce the average personal lines insurer’s Underwriting Expense Only ratio by about 30% (0.6 combined ratio points) and reduce the loss ratio by 2% to 4% (1.5 to 3.0 combined ratio points),” concludes MacDonald.