Dynamic insurance pricing is like wireless technology before dial-up modems became extinct: Everyone knew it was inevitable, but they were ready before it happened.

With usage-based insurance being considered by an increasing number of insurance companies, you had to know dynamic pricing couldn't be far behind. More specifically, with the increased availability of usage data, it wouldn't take long, much imagination, or much technological prowess to develop systems and algorithms that could analyze usage data, compute risk, rate that usage-based risk (along with its commensurate claims experience), and generate premiums. 

For example, if you have a telematics device in your car that indicates you’re texting, smoking a cigarette, flipping through songs on your iPod, driving 100,000 miles a year, and consistently exceeding the speed limit, your dynamically priced premium is likely to be higher than the price of your car. On the other hand, if you consistently drive below the speed limit, keep both hands on the wheel, wear your seatbelt, drive 1,000 miles a year, and have never had an accident, you can likely expect a preferred rate on your auto policy. But those examples are exaggeratedly easy. 

The Real Variables

Things start to get a tad more complicated when you consider other forms of insurance. How healthy are you? What do you do to maintain your health? What’s your medical history? What about your family’s medical history? Based on your health, your medical history, and your family’s medical history, what’s your life expectancy? 

Do you cycle? Ski? Skydive? Base jump? Scuba dive? Freedive? Where? How often? As you might imagine, these activities introduce a host of risk factors (or analytical variables) that are as unpredictable as they are potentially perilous. And they begin to suggest the complexity of rating and pricing insurance policies on dynamic conditions as opposed to static factors. 

Stay Tuned

Nothing’s impossible. As technology, data collection, and predictive analytics progress, everything, in fact, becomes more probable. But as long as insurance continues to depend on data to feed rating and underwriting programs, insurers will be protected from adverse selection, regardless of whether their pricing processes are automatic and dynamic or manual and iterative. 

But don’t go away. Dynamic pricing will become common practice. It’s just a matter of time.