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Telematics or Usage Based Insurance (UBI)- ‘Uber’ization of Auto Insurance

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digital transformation

The transformative digital age has already disrupted many industries from music to car-sharing and banking. One of the next in line is the insurance industry! Soon, your driving habits will have a bearing on your motor insurance premium as a few months ago, the Insurance Regulatory and Development Authority of India (IRDAI) in a draft proposal recommended adopting ‘Telematics for Motor Insurance’.

What is telematics, you may ask?

Telematics is a term coined by Kevin Ashton in 1999 that has gained currency in the past few years. In the taxonomy of the Internet of Things (IoT), telematics is in the topic family of machine-to-machine (M2M) communication mechanisms. Telematics insurance is a type of car insurance that takes advantage of devices such as smartphone apps, plug-in devices, smart tags, GPS devices and onboard diagnostic devices/sensors. However, the most common technology in telematics are black boxes fitted into customer vehicles as they provide precise data that is very hard to manipulate.

What’s inside the box?

There are 4 key elements to the black box:

  1. GPS system that provides information about where and when you drive, the type of road you’re on, the impact on the car etc.
  2. Motion sensor (or accelerometer), which provides information about impacts on the car – this could be from heavy braking or an accident
  3. SIM card for transmitting data
  4. Computer software that controls how the information is analysed and transmitted


Also Read: Usage Based Insurance (UBI) – Advantages, Challenges and FAQs


How do the telematics devices work?

Telematics devices keep records of a myriad of driving behaviours and send out the data to the car insurance company in India so that they can assess the risk and determine the car insurance premium accordingly. For example, a driver who drives mostly at night will have to pay higher premium than a driver who drives mostly during the daytime when the chance of accident is less. Similarly, those who drive their cars at a moderate speed are eligible for lower premium as they are less prone to accident and hence possess less risk to their insurers.

Telematics devices collect the below information:

  • The time of travel
  • The speed of the vehicle
  • The braking and accelerating patterns including instances of rapid acceleration, hard braking and hard cornering
  • Breaks taken on long journeys
  • Motorway miles
  • Total mileage
  • Deployment of air bag etc.

It helps in customizing the offering as per the customer’s driving behavior, rather than just giving a flat insurance price to every driver. Thus, a person driving the same vehicle in a smooth manner might have to pay a lesser amount as opposed to someone driving rash. Collectively, based on a number of metrics, it could ease out the claims process as well, as an insurer can investigate the claims better on the basis of other data points and impact analysis as well.

For example:

John uses his car on the weekends to travel within the city. He drives within speed limits and is an experienced driver with good driving skills. Steve is a relatively new driver who often accelerates or brakes abruptly, and drives his car during the week. He goes on car trips on the weekends.

John will be charged lesser premium as compared to Steve due to his driving as well as usage pattern which reduces his chances of raising a claim. On the other hand, Steve is relatively at a higher risk as he is new to driving and his driving pattern is rash too. Further, he also uses his car quite often as compared to John. Therefore, there is a higher probability of car damage and, in turn of an insurance claim, which makes him liable to pay higher premium as compared to John.

Various types of usage-based car insurance:

Globally, insurance companies offer multiple options to the policyholders concerning UBI. The premium is based on the chosen option. Note that these types can be known differently in different regions of the world. There is a frequent overlap when it comes to the terminology used to identify the type of insurance. Here’s a list of different types of UBI for vehicles.

  • Pay as You Drive (PAYD)

The car insurance premium is charged based on the actual distance that is travelled by the vehicle. The data is gathered from the reading of the odometer of the vehicle.

  • Pay How You Drive (PHYD)

In PHYD, the car insurance premium is charged based on the driving skills/patterns including acceleration, braking, hard cornering etc.

  • Pay as You Go (PAYG)

In PYYG model, the premium is charged after taking into consideration various data points such as the time of the day, driving actions, the time taken to cover the distance, and the historic risk factor of the road etc.

  • Distance-based Insurance aka Pay Per Mile

Pay Per Mile auto insurance is based on the number of miles covered by the vehicle during the policy period.

The big question: Can I choose UBI for my new car in India?

UBI is not widely available in India at present. However, there are a limited set of insurance providers in the country who are offering UBI. The list includes the likes of Bajaj Allianz General Insurance Company, ICICI Lombard, HDFC Ergo, TATA AIG, Liberty General Insurance etc.

The takeaway

As the auto insurance market becomes ever-more competitive, there is an imperative for insurers to identify new sources of rating information, such as telematics data, to get a closer view of a driver’s risk. Insurance carriers that execute a unique UBI strategy with the help of this technology can create powerful assets and competitive advantages out of the telematics data collected. Telematics technologies have a long history in other parts of the world such as the U.S., the U.K. and Italy. It will be interesting to see how telematics will shape the insurance industry in India in the next few years.

In the upcoming post we’ll cover the benefits as well as challenges of the user-based car insurance along with some more examples. Stay tuned!

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