Sharing Economy & Future Mobility vs Traditional Auto Insurance Rating

The main rating factors widely used in ‘traditional’ Auto insurance are as follows:

?        Location

?        Age

?        Marital status

?        Driving experience in years

?        Driving record

?        Claims history

?        Credit history

?        Previous insurance coverage

?        Vehicle type

?        Vehicle value

?        Vehicle age

?        Vehicle use

?        Expected Annual Mileage 

?        Coverages and deductibles

How does or should rating differ when considering sharing economy business? For this discussion let’s assume we are considering insuring a Rideshare or Delivery platform.

Usage Based Rating

The first major difference to a standard commercial auto insurance product should be the exposure base and how the applicable rating is applied. Traditionally auto insurance has typically been rated on a flat non-adjustable per vehicle basis.  Sharing economy platforms have embraced a usage based pricing model that adjusts on a per mile, per trip or per delivery basis. That means the insured only pays for how much they are actually driving rather than an assumed annual usage. Per mile is the preferred exposure measure as it is the most accurate reflection of the risk as opposed to per trip or delivery where mileage can vary over time. This is also beneficial for Insurers as it removes the possibility of under estimating the true exposure.

Different Rating Factors

?        Driver Tenure – In addition to how long someone has held a driving license, we want to know their experience in the ridesharing and delivery space.

?        Location – Knowing the Zip code of the drivers address is now less relevant. We care more about where ridesharing trips are being completed or where deliveries are being made. This can often be in very different locations to where the driver resides.

?        Time of Driving – We want to ascertain when drivers are completing their ridesharing trips and deliveries. Loss costs associated with daytime driving and night time driving are often very different.

?        Vehicle Type – Can we go into greater detail here than Insurers have gone previously. Can we look at the Advanced Driving Assist Systems (ADAS) and look at how these new technologies may impact auto loss costs?

?        Driving Behaviour – As the business is App based, platforms have GPS and some form of telematics capabilities allowing them to monitor driving behaviour. Monitoring will allow insurance companies to reward good drivers with a discount and punish bad drivers with a load. 

?        Driver Rating – Most sharing economy platforms adopt a peer to peer review system (5 start rating) as a risk management tool to control their driver pool and off-board poorly performing drivers. Drivers can be charged a differential per mile rate based on their scores. This will encourage drivers to drive safely and take extra care in order to get better rating and save on insurance costs.

More Granular Pricing 

Most traditional commercial auto business is priced using 5 or less rating factors. This is also true of most current sharing economy auto programmes. We believe that it is imperative that insurers partner with sharing economy platforms to create more granular rating plans that speak better to the true exposures faced. We need to go beyond a per mile rating by State or City and factor in some of the new rating factors described above. 

I often get asked whether installing full telematics capability into an application will save on insurance costs? This is not the right question to be asking. It is not purely about reducing insurance costs. It is more about providing the Insured with control over their insurance costs. I actually have to inform clients that installing telematics could result in increased insurance costs, if the results show that drivers are actually worse than we expect. Installing telematics does typically result in an initial reduction of loss cost (in some cases as much as 20% reduction) due to the ‘big brother effect’. The driver pool’s knowledge that they are being monitored does change their behaviour. However, a platform needs to go much further to produce larger benefits such as driver training and driver warnings the rough the app.

The key though with implementing a telematics programme is getting to a point where you can score drivers within a range of 1 to 5. 1 being the best and 5 being the worst and partnering with an insurer comfortable to trust these driver scores and apply a separate rating for each of those scores. Current single rating per mile programmes provide a rate for the average driver within the driver pool (a driver score of 3). A telematics based rating programme would provide lower rates for driver scores of 1 and 2 and higher rates for driver scores of 4 ad 5. The key here is that a sharing economy platform can then control their insurance cost by off-boarding drivers with a 5 if they deem the insurance costs too high or focus time and effort on improve those drivers with a score of 5 to a score of 1 or 2 and then reduce insurance costs as a result. Now the insured is fully in control of their insurance costs and can incentivise and retain drivers who generate the most profit for their platform.

The Apollo Ibott are committed to driving change and creating future proof insurance solutions for our clients. We believe this will be best achieved through forging long-term partnerships with clients and engaging in in-depth actuarial pricing workshops. These new bespoke products need to be created in collaboration between Insured and Insurers. The door is open at Apollo and the ibott team welcome anyone looking to take their insurance programme to the next level…