On the face of it, driving in the UK has become more dangerous in the last few years. But statistics can be deceiving.
Up to 1,500 drivers a day – or one-in-140 people per year – now make claims for “whiplash” injuries from car accidents, a big rise from previously*. The Association of British Insurers calls the UK the “whiplash capital of Europe” due to the mounting claims its members are facing.
Fraud, however, is a problem. Whiplash – which is a strain or stretch to the neck caused by a sudden jolt – is hard to diagnose and easy for drivers and passengers to exaggerate, or even falsify. A well known ruse is for criminals to brake suddenly, allowing drivers in the next vehicle to career unsuspectingly into their bumper.
The Insurance Fraud Bureau (IFB), an industry-funded group, estimates that 30,000 accidents are faked every year, with claims averaging £17,000**.
To many, such accidents are “victimless”. Nobody really gets hurt and it is the insurance companies, rather than the individuals involved, who pay. But the cumulative effect is vast. The IFB estimates that car accident scams cost the insurance industry £350m a year, and that everyone’s premiums have risen £45 annually as a result***.
Pay as you drive
Mounting rates of fraud are just one reason why insurers have been looking at fundamentally different ways of delivering automotive coverage. Called Usage-Based Insurance (UBI), this technology-centric approach aims to take the uncertainty out of traffic accidents, while allowing drivers to pay based on their own safety records, rather than the performance of the whole insurance pool.
Traditional insurance fails to distinguish between good drivers – who cost insurance little and drive profit – and bad ones, who tend to claim more frequently and are more inclined to engage in fraudulent activities. And most insurance products take no account of whether a person drives 100,000 miles a year or 100 miles. With premiums rising, and continuing decline in profits, there is now greater pressure for more personal pricing, rather than lumping everyone in together.
UBI customers install a small connected and interactive telematics device in their vehicles that records their driving habits and mileage, and other more detailed information such as harsh braking, excessive acceleration and corning through G-forces applied on the installed device or mobile phone solution.
The direct insight into the customers’ car helps end the ambiguity around traffic accidents and reduces fraudulent claims. But more broadly it helps insurers build up a truer picture of each customer’s risk profile, and to set rates accordingly, according to Louwrens Appelcryn, business development manager at Vodafone Global Enterprise.
It also helps insurers manage the claims process more smoothly should there be an accident. Currently, claims management is a major cost headache for insurers because of the time it takes to work out what happened. Every day’s delay can hundreds of euros to pay-outs, as lawyers get involved, and additional injuries or vehicle damages are reported.
Second, UBI improves profitability, Appelcryn says. From a typical margin of six per cent, insurers can hope to secure upwards of 20 per cent with UBI.
"Motor insurers have not been very profitable in the last 10-15 years. With UBI, you can filter out bad risk from good risk. Good drivers are self-selecting. They say: ‘I want to put this device in my car’." Louwrens Appelcryn,
business development manager at Vodafone Global Enterprise
UBI also helps smooth out the costs of providing to currently “over-subsidised” segments, such as elderly or young, first-time drivers. At the same time, bad risks – including people who make lots of claims – can be pushed off the books.
Pay on the go
UBI is effectively a Pay “HOW” You Drive contract between driver and company, offering new opportunities for drivers as well as insurers. UBI systems can improve fuel efficiency, and have been supported by environmental groups. More careful driving could reduce the amount of fuel wasted when vehicles drive above the optimum speed (for fuel economy) or brake suddenly.
And UBI could help improve safety, either by drivers curtailing their own worst impulses, or from associated systems that stop drivers from texting while driving, young drivers from going too fast, or prevent people from driving when drunk.
Because of the benefits to both sides, UBI has started to become increasingly popular in Europe and elsewhere.
ABI Research expects to see 44 million UBI customers in the EU by 2017, up from 1.5 million in 2010****.
Ptolemus, a research group that specialises in telematics-based insurance, says companies have launched a total of 54 commercial UBI services so far, with 40 of those in Europe. Within the EU, Italy and the UK lead the way, followed by France†.
Italy is planning to make telematics devices mandatory, as it seeks to eradicate fraud and reduce premiums for safer drivers. “Fraud is extremely prevalent in Southern European markets, and you’ve seen a flare-up in the UK. You can probably draw a linkage with the economic crisis,” Appelcryn says.
Five of the top 10 US insurers currently offer UBI policies, with the market expected to grow fast over the next few years. The Center for Insurance Policy and Research, working with the National Association of Insurance Commissioners, claims that 20 per cent of the 200 million policy market could be UBI-based within five years††.
Worldwide, ABI forecasts 89 million telematics-based insurance policy-holders by 2017†††.
In many countries, UBI insurance is logical next step for in-car services that already track drivers for safety, break-down, or anti-robbery purposes.
UBI is particularly popular among younger drivers, who pay among the highest insurance rates and therefore have the greatest incentive to find cheaper alternatives. Some UK experts expect all new young drivers to be on UBI within the next few years, often encouraged by parents who want to cut bills and see their kids drive safely.
Because the on-board devices track when the vehicle is being driven, at what speed, and how drivers are braking and cornering, they are ideal as a stand-in teaching aid or for parents who want to check on how their kids are driving the family station-wagon.
Insurance services already on the UK market allow both customers and insurers to review their statistics online and – in some cases – for the insurer to terminate a contract if the driver goes above a certain speed or otherwise drives poorly.
At the moment, UK authorities do not allow so-called “event data recording” to be used as sole evidence in insurance claims proceedings. But that is probably just a matter of time. Once on-board devices and their accompanying services are standardised, there will be no reason not to rely on them. And the UK government has recently shown that it is keen to get behind UBI, especially following complaints about rising insurance prices and the emergence of the so-called “compensation culture”.
In time, it is likely that telematics-based UBI will help to dramatically streamline the claims process and reduce the incidence of fraud, according to Strategy Analytics, a research firm.
“Eventually, aftermarket and embedded vehicle connectivity technology will speed the claims process and shorten the time required for accident investigations,” it says††††.
“In the future, fraud will be almost impossible to perpetuate without hacking into on-board modules to corrupt the data being transmitted.”
However, the adoption of UBI may not all be plain sailing. ABI Research says several other issues could hamper progress, if not properly managed by insurers, technology companies, and carmakers. These include customers’ privacy concerns from giving up so much information, a lack of standards, and the difficulty for insurers of assessing data without any historical basis to work on.
For insurers, UBI provides a platform for more dynamic risk calculation and almost endless data analytics. The direct link with the vehicle offers the chance to glean more customer information and offer an array of tailored, additional products on top of the standard coverage. Insurers will go from having a once-a-year interaction with customers when a policy is due for renewal to having a more-or-less continuous digital connection.
Appelcryn does not think there is anything that hold UBI back. “Previously I wasn’t sure. But now there are just too many stars aligned: the devices, the connectivity solutions, the focus from regulators. It will probably systematically take over and grow substantially over the next three to five years. By then, it will be the default the motor insurance mechanism and policy.”
The only question is exactly what technology the systems will run – for example, whether insurers and car manufacturers will look to develop proprietary telematics equipment and links or rely on existing, widely used networks.
* “The UK’s pain in the neck culture must end, says the ABI”. The Association of British Insurers. 24 April 2012. “ http://www.abi.org.uk
** “Car crash insurance scams soar”. David Batty. The Guardian. 21 August 2010. http://www.guardian.co.uk
*** “Car crash insurance scams soar”. Ibid. (ABI puts the figure at £90)
**** “89 Million Insurance Telematics Subscribers Globally by 2017, Says ABI Research”. Business Wire. 10 February 2012. http://www.businesswire.com
† Insurance Telematics Study. Ptolemus. May 2012. http://www.ptolemus.com
†† Usage-Based Insurance. NAIC. 5 June 2012. http://www.naic.org
†††”The UK’s pain in the neck culture must end, says the ABI”. Op cit.
†††† “Will UK Turn to Telematics to Fix Auto Insurance Woes?”. Strategy Analytics. 16 February 2012. http://blogs.strategyanalytics.com.