Santa Barbara, CA – September 8, 2020 – Commentary by Michael DeGusta, ClarionDoor CEO, as featured in Insurance Innovation Reporter.

The latest industry trend has auto insurers rebating or discounting premiums to policyholders who likely didn’t use or have a need for paid-for coverage, and it looks good on the surface. Dig just a little deeper, however, and it may also be revealing a major problem in how risk is evaluated and used to determine annual premiums.

So far, many major auto insurers, including The Hartford, State Farm, American Family, and Allstate, have put refund programs in place to compensate customers for reduced driving due to the COVID-19 or Coronavirus global pandemic, and more appear to be jumping on that bandwagon. Most of these programs follow the same formula, allotting a flat dollar amount to policyholders for each covered vehicle and paying out by physical paper checks delivered via snail mail.

While the refund amount is relatively small, often between $25 and $75 per vehicle, everyone likes getting checks in the mail. What policyholders may not realize is that this act of goodwill is not only temporary, but indicative of what should have been happening with insurance premiums all along. No doubt, once the world gets back to normal, so will insurance premiums. In the meantime, policyholders may cash those checks while looking just a bit closer at competitors with “pay-as-you-go” or usage-based insurance (UBI) products.

It is absolutely critical for insurance companies to recognize the challenges facing customers on an ongoing basis in order to provide better service. In spite of the fact that the National Association of Insurance Commissioners (NAIC) now seems inclined to review the practice for regulatory compliance, rebating is a recognition of a distinct customer need, and on a certain level, the insurers offering refunds should be commended. (Is it really the thought that counts?) However, there are alternative, and likely better, options that could have mitigated this action all together.

In looking at risk management, premiums are calculated on a number of different factors, which combined determine the risk of the individual. In terms of personal auto insurance, the amount that an individual drives is one of those factors, and quite a significant one. The insurers that are issuing refunds have determined that since policyholders are driving less, there is less risk, so money back for unused products or services may be warranted. Moving in a UBI direction, isn’t it? It’s also undoubtedly part of the reason Liberty Mutual is so very fond of saying “you only pay for what you need” in recent commercials.

That said, what about UBI? Could UBI really have mitigated this problem all together? In a UBI scenario, if a policyholder drives 1,000 miles one month, and 500 the next month, the premium would be adjusted down accordingly for the latter month for less miles driven. Basically, UBI already has the model to support the situation that many of these insurers are going through now.

Why Haven’t More Insurers Adopted UBI?

So, why haven’t more insurance companies adopted the UBI model? The technology to support UBI is already available and even better than it was back in 1999 when the concept was introduced. In the U.S. at least, regulatory bodies across the country have embraced UBI and many major insurers, like GEICO and Progressive for example, already have programs in place. However, the cost of sensors and software associated with such programs has been somewhat prohibitive for small to mid-size players in the personal auto space especially.

The industry challenge now is to continue to implement full-scale UBI programs and to push these programs out to policyholders as quickly as possible. Right now, personal and commercial auto lines of business are the obvious home base for UBI but look for it soon to jump to other lines, such as homeowners and perhaps even professional liability. UBI is a playing field leveler, and if there was ever a time to rethink how insurance risk is managed, especially for personal lines, now is it.

MICHAEL DEGUSTA // Michael DeGusta is the CEO of ClarionDoor.