News Analysis: Big data could help put brakes on car insurance losses

Be mindful next time you slam on the brakes -- it might just increase your car insurance.

Chinese car insurers announced they will start using big data when pricing their customers, employing a Usage-Based Insurance (UBI) structure at a time when the auto insurance industry is facing shrinking revenues.

Unlike traditional insurance, which charges different premiums based on a driver's past claims, UBI looks into a client's real-time driving pattern tracked by the analytic systems in cars.

China's first online insurance company Zhong An and leading insurer Ping An launched Bao Biao Car Insurance last week to explore the country's less-charted UBI territory.

By adding an on-board diagnostics (OBD) device on the cars of the clients, Zhong An can collect and analyze usage data to decide if they have driven too long or have speeding problems. Rules-abiding drivers will be awarded with lower premium requirement.

UBI came in as traditional car insurance businesses in China hit a soft patch. Last year, 38 out of 42 property insurance firms reported losses in their car insurance businesses mainly due to high sales cost and huge amount of claims paid. In September, American International Group (AIG) decided to suspend its auto insurance business in China after disappointing figures.

The benefits of UBI to insurers are obvious. Traditionally, car insurers face the "moral hazard" problem, meaning drivers may not have the incentive to avoid minor accidents knowing that their cars are safely insured.

Under UBI, however, accident-prone drivers are not likely to escape the clairvoyant analytic programs such as OBD and will be asked to pay higher premiums, thus making the car insurers less susceptible to such problems. Discounted premiums also mean incentives for responsible drivers.

The key to UBI is an accurate analysis of drivers' behaviors based on huge amount of user data, said Hai Lan, founder of online car forum nextcar.com.

By understanding the driver using a more dynamic analytic system, insurers can even offer suggestions to drivers during extreme weather, which will be handy to avoid accidents and thus ultimately lower the claim ratio.

An industry estimate showed UBI could be a 300 billion yuan (47.1 billion U.S. dollars) market in China by 2020 if regulators continue to push auto insurance marketization and welcome positive change brought by new players.

Zhong An has received strong backing from Internet giants Alibaba and Tencent whose rich social media profiles are expected to pave way for an effective UBI model.

It usually takes half a year for an UBI insurer to size up the driver and the market will have to wait even longer to find out if Zhong An can be the game-changer in the struggling car insurance sector.

"Getting started is already a triumph for us," said Zhong An chief executive Chen Jin. "We don't want to predict if we can make it, but at least we are trying." Endi