Usage-based insurance could revolutionise India's motor insurance industry. In this model, an insurance company rewards a safe driver with low premiums or a no-claims bonus, while reckless drivers pay higher premiums. This is different from conventional motor insurance, where the safeness of the driver is a reflection of his driving history rather than present indicators.
The insurance companies monitor the driving patterns through telematics devices installed in the car—including a global positioning system receiver and a device consisting of a GPRS modem or an SMS sender—which record and send data to a configured mobile phone or computer. The devices could be standalone gadgets or onboard diagnostic devices fitted under the dashboard. They keep a watch on distance travelled, types of roads used, harsh braking, sharp turns, engine failure, maintenance requirements, airbag deployments, and the time and duration of the journey. Right now, pilot programmes are being conducted throughout India.
“The pricing for usage-based insurance is based on the hypothesis that, lesser the exposure to the road, lesser would be the chance of an accident,” says Mukesh Kumar, executive director, HDFC ERGO General Insurance Company. “The data captured from the device can be used to study the correlation between the driving pattern and claims. Based on the outcome, it could be possible to price for the individual risk optimally, passing on benefit to 'safe drivers', and thereby helping the insured to reduce the premium and insurers to attract safer risks.”
Said Puneet Sahni, head of product development, SBI General Insurance: “The telematics technology has benefitted insurers in western countries, where, evidently, there is a reduction in frequency of claims by a sizeable margin. In India, the proof of the concept is yet to be seen.”
Insurers, however, do get better insight into the driving behaviour, facilitating risk-based underwriting. “Telematics is definitely the way forward as it's not just about insurance, it also delivers on safety and emergency care during accidents,” says M. Ravichandran, president, insurance, Tata AIG General Insurance. “Drivers receive a driving score at the end of each ride and the individual is charged premium based on the usage of the vehicle. While it helps improving one’s driving skills, it also enables tracking stolen vehicles. In developed markets, the premium rates also depend on routes used. The adoption of UBI in India, however, is still some time away.”
Though telematics as a risk-based pricing tool is yet to be adopted in India, companies are increasingly finding that it brings in significant benefits to their companies. Says Ravichandran: “Telematics can immensely help increase a fleet’s productivity, reduce labour costs, minimise fuel wastage, improve customer service, develop fleet safety, get better security, reduce operating expenses, or even clamp down on bad driving and unauthorised use of vehicles. Customers also enjoy discounted premiums for safe driving and car mileage.”
But there are a few basic challenges in the Indian insurance environment that could present hurdles in the adoption of usage-based insurance in India. “There is no driver underwriting being used as a rating factor for pricing of motor insurance in India,” says Sahni. “Also, with multiple drivers driving the same vehicle, it is practically difficult to assess driver behaviour. Any claim under the motor insurance policy, so far as the driver holds a valid driving licence, is admitted as there is no 'named driver policies' available in India. Apart from the above issues, the cost of deploying a black box or any such telematics device is roughly around Rs 3,000. The current average premium for motor insurance for private cars in India is around Rs 12,000. Motor insurance is a low-margin business in India and, hence, neither the insurer nor the insured is willing or is ready to pay for the deployment of the telematics device.”