NAIC.Telematics

This reading, Usage-Based Insurance and Vehicle Telematics: Insurance Market and Regulatory Implications, looks at the technological advances that made UBI possible and the implications for insurers, consumers, and state regulators. (Note that the reading is 86 pages, but the syllabus covers only pages 1-16, 42-60)

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Study Tips

The use of UBI and Telematics has similarities to the use of credit scores. Be sure to remind yourself of the arguments for & against the use of credit scores in Kucera.Credit and McCarty.Credit because many of them also apply to UBI. Other than that, this is a pretty easy reading. Note that the reading is 86 pages, but the syllabus covers only pages 1-16 (excluding section on Tower Watson’s DriveAbility) and pages 42-60.

Estimated study time: 1 hour (not including subsequent review time or review of the credit score readings Kucera.Credit and McCarty.Credit)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• impact of UBI (both positive & negative) on low-income drivers
• criticisms of UBI not related to low-income drivers
• driving behaviors that have a negative effect on your UBI score

Questions held out from Fall 2019 exam: #1. (Skip these now to have a fresh exam to practice on later. For links to these questions, see Exam Summaries.)

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Spring #1)	benefits of UBI: - to society	concerns of UBI: - by regulator
E (2017.Fall #2)	availability / affordability: - impact of UBI	driving behavior: - penalized by UBI
E (2017.Spring #1)	discrimination: - low-income drivers (of UBI)	benefits: - low-income drivers (of UBI)	other criticisms: - of UBI
E (2017.Spring #6)	see Cook.Personal	see Cook.Personal	SCENARIO: - residual market impact

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In Plain English!

Intro

This is a very interesting topic. Based on history however, it is not heavily tested but that may be because the reading hasn't been on the syllabus for very long. It's not hard so you if you take the time to learn it, it should be easy points. Note that even though telematics is a relatively new idea in insurance, self-driving cars could render the technology obsolete, at least in its current form. Anyhoo...

Let's start by defining the terms we'll be using:

Question: define the term usage-based insurance (UBI)

• a type of auto insurance based on:

   - how far a vehicle is driven

   - where it’s driven

   - how it’s driven

Question: define the term telematics

• the branch of information technology that deals with the long-distance transmission of computerized information

The terms UBI and telematics often appear together and are sometimes used interchangeably but they represent different ideas.

Question: how is UBI related to telematics

• UBI is often implemented using telematics

(the telematics could be a device that plugs into your car)

• the telematics device would send real-time information to your insurer about how far, where, and how your vehicle is driven
• your insurer would then rate you based on this information

It's pretty obvious that how far you drive (lower mileage is better for your rate) and where you drive (dense city, suburb, rural, crime level) would impact your rating, but what do we mean we say talk about how you drive?

Question: identify information that a telematics device might transmit regarding how you drive

• speeding, rapid acceleration
• hard-braking
• swerving
• cell-phone use

Alice the Actuary does all these things. Her rates are high but she has a lot of fun.

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Benefits Related to UBI

Usage-based insurance has certain advantages over traditional insurance that uses rating variables such as age, sex, marital status, and home ownership .

Question: identify BENEFITS of UBI to the consumer

• Benefits to the consumer almost always relate to availability and affordability:

availability:

   - may increase because insurers can price risk more accurately

   - accurate pricing means insurer is better able to manage risk

   - insurer may then accept more risk and write more policies (increases availability)

affordability:

   - UBI is better at identifying good drivers

   - good drivers will have lower rates under telematics

• The flip side is that bad drivers will have higher rates under telematics, which isn't good for consumers, or at least those particular consumers, but this leads to the next benefit:

consumer control:

   - telematics can provide real-time feedback on driving habits

   - all drivers (good and bad) can improve driving habits and get lower rates

     (the feedback loop is shorter than with traditional pricing)

Question: identify BENEFITS of UBI to insurers

accurate pricing:

   - allows better risk management → lower losses → financial strength

     → can identify & retain low-risk drivers

     → can identify high-risk drivers and price accordingly or provide feedback so high-risk drivers can improve driving habits

faster claims settlement:

   - accident information is immediately available through telematics

Question: identify BENEFITS of UBI to society

• less discriminatory rating:

   - rates are based on how you drive (instead of age, sex, marital status, home ownership)

• encourages less driving:

   - rates are directly related to how far you drive (leads to fewer accidents, less congestion, less pollution, lower infrastructure costs)

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Concerns Related to UBI

With any new technology (especially digital technology) there are also concerns.

Question: identify CONCERNS related to UBI [Hint: D-TOPIC]

Data credibility & manipulation

   - will data be credible, especially at early stages of adoption

   - digital devices are subject to manipulation by hacking

Transparency

   - will consumers understand how their data is used (device is a black box)

Oversight

   - is there sufficient regulatory oversight for UBI (device is a black box)

Privacy

   - will personal data that's collected be secure (used only for loss mitigation/pricing, not sold to 3rd parties)

Income level

   - lower-income drivers may be disproportionately affected by cost of device

Cost

   - cost of device may be significant for middle-income drivers also

The next quiz also contains exam problems. Reminder: The BattleCards contain summarized answers to exam problems and other important content. Don't skip them!

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