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​As Oil Prices Plummet Insurance Companies Lean on Big Data

Gas, Insurance and Big Data

21Sep

The struggling market in oil has had ripple effects all over the world. Economies dependent on oil exports are suffering, gas prices are dropping, oil companies are scrambling to cut production and hoard money, and insurance companies are in trouble. This last point is unexpected. Most people can see how the prolonged fall in oil prices can affect the oil and gas industries. However, the secondary effect of cheap oil on insurance is not clear at first glance.

The key lies in the fact that lower gas prices means more driving. The cheaper gas becomes, the more Americans drive. And the longer gas prices stay cheap, the more Americans get accustomed to the extra driving, making the trend last even longer. As a result, the increased number of drivers on the road at any time leads to more accidents and crashes. Take it from this Orange County personal injury lawyer who sees the direct correlation between heavy traffic and reckless driving. Even if drivers are not driving more recklessly than before, there are more of them trying to travel over the same roads and the likelihood of crashes are increased.

This poses a problem for insurance companies. They can't temporarily raise prices on everyone, because that would spark outcry and negative PR. They also can't just eat the costs, because nobody knows how long the weak market in oil will continue. There is one way out that insurers are using and it involves big data tools. Auto insurance companies are starting to use Tableau on Hadoop and other toolkits to scrutinize customer data. This allows them to offer more personalized insurance packages to their customers, charging higher prices to people who are more likely to get into accidents and lower prices to those who are safer drivers.

That basic concept is nothing new, but the data is. Insurance companies have begun offering customers a new deal: a shot at lower prices if they install a tracking device in their car. The tracking device transmits data about driving habits, such as how fast the driver drives, how rapidly they accelerate, how tightly they turn, and so on. This data is of vital importance to insurance companies.

The basic tools that insurance companies have been using to decide how likely customers are to get into accidents and file claims are demographic information and past driving history. These are fairly crude measures of driving safety, because aside from driving history they generally are not directly related to driving ability. The insurance companies and their actuaries need to devise complex statistical models to determine how to price insurance products for customers with various characteristics.

By tapping into driving-habit data from devices in customers' cars, auto insurance carriers have access to data that is much better at predicting actual driving performance. It is critical to have good data if insurers are to price correctly, and better data means more efficient online insurance quotes.

Efficient pricing is now more important than ever. With more cars on the road due to dropping oil prices, car accidents — and therefore claims — are on the rise. If insurance companies want to stay profitable, they will need to take advantage of the power of big data to extract as much value as possible without overcharging people unecessarily. Insurance companies need to charge poorer drivers more to cover the increased possibility that they will make a claim and the company will need to spend money to replace or repair their car. That possibility has increased now that cheap gas has more Americans driving.

This is just one example of the way big data is transforming whole industries. In this case, auto insurers are already moving in the direction of collecting data, but the oil price effect incentivizes them to move faster on the issue. Expect to see more development of big data for creative business uses as data science grows and competition heats up.

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