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Usage-Based Insurance—Impact on Insurers and Potential Implications for InsurTech

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  • Xin Che
  • Andre Liebenberg
  • Jianren Xu

Abstract

Insurers are increasingly embracing the InsurTech ecosystem. The most important InsurTech-related trend in automobile insurance is usage-based insurance (UBI), which enables insurers to access and incorporate drivers’ behavioral risk factors in actuarial pricing. Using a difference-in-difference research design with firm fixed effects, we provide evidence that UBI improves private passenger auto liability (PPAL) insurers’ underwriting performance by reducing their loss ratio. However, the improvement in underwriting performance is only significant among early UBI adopters, highlighting the early-mover advantage in InsurTech. Also, UBI produces benefits only when it matures. Our findings are robust to analyses that address potential reverse causality and self-selection bias. Additional tests show that early UBI adopters experience a significant increase in their market share, implying UBI’s advantage to attract low-risk drivers from other insurers. The overall performance effect of UBI programs for early adopters is a 1% increase in ROA and a 3% increase in ROE. The policy implications of our findings from the perspective of insurers should be of interest to firms’ management, actuaries, investors, and rating agencies.

Suggested Citation

  • Xin Che & Andre Liebenberg & Jianren Xu, 2022. "Usage-Based Insurance—Impact on Insurers and Potential Implications for InsurTech," North American Actuarial Journal, Taylor & Francis Journals, vol. 26(3), pages 428-455, August.
    • Handle: RePEc:taf:uaajxx:v:26:y:2022:i:3:p:428-455
    DOI: 10.1080/10920277.2021.1953536
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    Cited by:

    1. Martin Eling & Irina Gemmo & Danjela Guxha & Hato Schmeiser, 2024. "Big data, risk classification, and privacy in insurance markets," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 49(1), pages 75-126, March.
    2. Shengkun Xie, 2024. "Analyzing the Influence of Telematics-Based Pricing Strategies on Traditional Rating Factors in Auto Insurance Rate Regulation," Mathematics, MDPI, vol. 12(19), pages 1-23, October.
    3. Chang, Vincent Y.L., 2023. "Do InsurTech startups disrupt the insurance industry?," Finance Research Letters, Elsevier, vol. 57(C).
    4. Zhiyu Quan & Changyue Hu & Panyi Dong & Emiliano A. Valdez, 2024. "Improving Business Insurance Loss Models by Leveraging InsurTech Innovation," Papers 2401.16723, arXiv.org.
    5. Serkan Eti & Hasan Dinçer & Hasan Meral & Serhat Yüksel & Yaşar Gökalp, 2024. "Insurtech in Europe: identifying the top investment priorities for driving innovation," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 10(1), pages 1-24, December.

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