A usage-based insurance (UBI) pricing model considering customer retention

Hong-Jie Li, Xing-Gang Luo, Zhong-Liang Zhang, Shen-Wei Huang and Wei Jiang

Insurance: Mathematics and Economics, 2025, vol. 124, issue C

Abstract: Usage-based insurance (UBI) charges drivers differently through telematics-based driving risk assessments. While current UBI pricing models differentiate driving risks, their overly discriminative prices may expel risky drivers, whose driving behaviors could have been modified, thereby incurring insurers' losses in profits. We propose a new UBI pricing model to address this problem by incorporating customer retention into the conventional UBI framework. Specifically, our model offers targeted discounts based on drivers' price sensitivity to retain those who may terminate the insurance contract, as well as provides concrete suggestions to help them modify unsafe driving behaviors. Using empirical data from a major Chinese auto insurer, we confirm that our model yields higher profits for insurers over the UBI pricing model that does not account for customer retention, and exemplify how suggestions for drivers can be drawn from driving profiles.

Keywords: Usage-based insurance; Pricing model; Customer retention; Price sensitivity; Model transparency (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:124:y:2025:i:c:s0167668725000794

DOI: 10.1016/j.insmatheco.2025.103132

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