How finance shapes usage-based insurance products

Usage-based insurance (UBI) changes the way an insurer prices, administers and reports risk. Instead of relying mainly on traditional rating factors, a product may use kilometres driven, time of day, braking patterns, acceleration, location or other behavioural signals to adjust premiums and rewards. That shift places finance at the centre of product design, rather than limiting its role to budgeting and month-end reporting.

For Australian insurers, the opportunity is significant. Customers are accustomed to app-based services, digital payments and personalised pricing, while the motor market includes urban commuters in Sydney and Melbourne, long-distance drivers in regional areas, and households managing rising fuel, repair and insurance costs. A successful model must connect commercial objectives with actuarial discipline, customer trust, regulatory compliance and reliable data operations.

Translating customer behaviour into a viable product

Finance helps determine whether a usage-based proposition can produce sustainable returns for both the insurer and its policyholders. The first task is to define the economic unit: a kilometre, a trip, a driving hour, a risk score or a combination of fixed and variable charges. Each choice affects premium stability, customer understanding, claims experience and administrative cost.

A low-mileage product may appeal to people who work from home or use public transport during the week. A pay-as-you-drive policy could suit households with a second car, while a safe-driving reward may attract younger motorists who want a path to lower premiums. Finance teams can model these segments using expected frequency, severity, acquisition cost, telematics expense, claims handling costs and the likely rate of customer retention.

The business case should also consider adverse selection. Drivers who expect to travel very little may be especially motivated to join, while high-mileage or higher-risk customers may remain in conventional products. Scenario analysis can test how the portfolio behaves when actual kilometres, repair inflation, claims frequency or customer take-up differ from assumptions.

Building pricing and reserving discipline

Usage data can make rating more responsive, but it does not eliminate uncertainty. A finance function working with actuarial, underwriting and data science teams can establish clear controls around the credibility of behavioural variables. A pattern observed in a small pilot should not automatically become a permanent pricing factor.

The model should separate genuinely predictive information from characteristics that merely reflect geography, income or access to technology. For example, a driver in outer Melbourne may travel longer distances than someone living near the CBD, while a regional customer may have limited mobile coverage. These differences can influence recorded data without necessarily reflecting unsafe behaviour. Pricing governance must identify such effects before they become unfair or commercially damaging.

Finance also has a central role in claims provisions and performance monitoring. Under IFRS 17, insurers need reliable information to measure groups of contracts, assess expected cash flows and explain changes in insurance service results. A usage-based product may require new assumptions about premium collection, coverage units, lapse behaviour, roadside assistance and claims development. The finance team should ensure the policy administration, telematics and general ledger systems can reconcile at the required level of detail.

Managing data, technology and operating costs

A UBI product depends on a chain of technology services: a mobile application or connected device, consent management, data transmission, cloud storage, analytics, customer notifications and integration with policy and claims platforms. Finance should assess the total cost of ownership rather than focusing only on the visible price of a sensor or software licence.

Costs may vary with the number of active policies, data frequency and the number of external providers involved. A model that appears profitable at launch can weaken when every trip generates high-volume data, when customers require technical support, or when a provider charges for data retrieval during claims. Finance can create unit economics that track acquisition cost, telematics cost per policy, support cost per active customer and contribution margin by segment.

Vendor governance is part of this analysis. The conference’s exhibit hall providers can help insurers compare platforms, advisory services and integration capabilities, but procurement should examine service levels, cyber controls, portability of data and exit arrangements. APRA-regulated insurers also need to consider operational resilience and third-party risk, including how a technology outage could affect pricing, claims or customer communications.

Designing trust into the customer proposition

A customer will accept behavioural insurance only when the value exchange is clear. Finance can help quantify the reward, cap unexpected charges and test whether the pricing formula is understandable in everyday use. Customers should know what data is collected, how often it is used, what events affect their premium and whether a poor score can increase the price or only reduce a discount.

Privacy and consent need to be designed into the product from the beginning. The Privacy Act 1988 and Australian privacy principles create obligations around collection, use, disclosure, security and access to personal information. Location data and driving behaviour can feel particularly intrusive, so a short consent statement is unlikely to be enough on its own. Product teams should explain data practices in plain English and provide practical controls where possible.

ASIC’s focus on consumer outcomes and product governance also makes transparency commercially important. Finance can support value assessments by comparing premiums, discounts, fees, claim outcomes and cancellation rates across customer groups. If a product delivers attractive marketing promises but produces limited real-world savings, the insurer may face conduct risk as well as reputational damage.

Connecting the product with Australian market realities

Australian conditions make portfolio segmentation especially important. A driver commuting between Parramatta and central Sydney may have a very different exposure from someone travelling long distances between regional towns in Queensland or Western Australia. Road quality, distances to repairers, weather events, vehicle availability and mobile coverage can influence both risk and the reliability of usage data.

State-based charges and insurance arrangements also complicate pricing. Motor insurers need to account for differences in stamp duty, registration settings and compulsory third-party schemes, including the NSW CTP environment. A usage-based comprehensive product must make clear which parts of the customer’s overall motoring cost it affects and which obligations remain fixed regardless of kilometres travelled.

The product should reflect local driving habits without turning them into simplistic assumptions. Weekend travel, school runs, holiday road trips and occasional use of a second vehicle may create irregular patterns that a monthly premium model handles better than a strict per-kilometre tariff. Customers paying through direct debit may also value predictable instalments, even when the underlying risk assessment changes frequently.

Climate and catastrophe exposure deserve attention as well. Floods, bushfires, hail and severe storms can affect claims costs across Australian regions, while usage data may say little about these hazards. Finance must prevent the behavioural score from creating a false sense of precision and should combine telematics with broader portfolio, geographic and catastrophe analysis.

Establishing performance measures and accountability

A UBI initiative needs a balanced scorecard. Premium growth and loss ratio matter, but they should sit alongside customer retention, complaint volumes, discount distribution, data completeness, consent rates, claims settlement times and technology incidents. These measures show whether the product is achieving its intended customer and commercial outcomes.

Finance can lead monthly or quarterly reviews that compare actual performance with the original business case. Useful questions include whether safer drivers are receiving meaningful benefits, whether high-risk customers are being priced appropriately, whether telematics costs are rising faster than revenue, and whether the product is attracting the intended market. Variances should result in documented actions rather than informal explanations.

Governance should define who can change the pricing algorithm, approve a new data source or alter the discount range. Model risk controls should include version management, independent validation, monitoring for drift and clear escalation thresholds. Audit trails are valuable when a customer challenges a premium or when management needs to explain a result to the board, regulator or external auditor.

Practical priorities for finance and product teams

A well-designed usage-based product gives finance a broader mandate: shaping the proposition, challenging assumptions, protecting customer value and ensuring that operational detail supports the financial promise. When pricing, technology, actuarial analysis and reporting are connected from the start, insurers can respond to changing mobility patterns without sacrificing control.

For Australian industry leaders, the next step is to bring these disciplines into the same working conversation. Explore the educational sessions, professional development opportunities and solution providers available through IASA Conference, then use those insights to build a commercially sound, transparent and resilient usage-based insurance proposition.