Improving Automobile Insurance Ratemaking Using Telematics: Incorporating Mileage and Driver Behaviour Data

XREAP2016-08

31 Pages Posted: 14 Dec 2016

See all articles by Mercedes Ayuso

Mercedes Ayuso

University of Barcelona

Montserrat Guillen

Jens Perch Nielsen

City University London - Cass Business School

Date Written: December 14, 2016

Abstract

We show how data collected from a GPS device can be incorporated in motor insurance ratemaking. The calculation of premium rates based upon driver behaviour represents an opportunity for the insurance sector. Our approach is based on count data regression models for frequency, where exposure is driven by the distance travelled and additional parameters that capture characteristics of automobile usage and which may affect claiming behaviour. We propose implementing a classical frequency model that is updated with telemetrics information. We illustrate the method using real data from usage-based insurance policies. Results show that not only the distance travelled by the driver, but also driver habits, significantly influence the expected number of accidents and, hence, the cost of insurance coverage. Telemetry should facilitate the inclusion within insurance pricing of those factors that traffic authorities identify as being associated with risky drivers, including, for example, traffic violations.

Keywords: tariff, premium calculation, pay-as-you-drive insurance, count data models

Suggested Citation

Ayuso, Mercedes and Guillen, Montserrat and Nielsen, Jens Perch, Improving Automobile Insurance Ratemaking Using Telematics: Incorporating Mileage and Driver Behaviour Data (December 14, 2016). XREAP2016-08, Available at SSRN: https://ssrn.com/abstract=2885214 or http://dx.doi.org/10.2139/ssrn.2885214

Mercedes Ayuso (Contact Author)

University of Barcelona ( email )

Av. Diagonal 690
Barcelona, E-08034
Spain
+34 934 021409 (Phone)
+34 934 021 821 (Fax)

Jens Perch Nielsen

City University London - Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

No contact information is available for Montserrat Guillen

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