Privacy for Driving Data, Profit for Whom? An Economic Analysis of Usage-Based Insurance under Competition

Compared to traditional insurance, emerging usage-based insurance (UBI) allows insurers to accurately assess individual risk profiles and personalize premiums based on users’ driving behavior data. Although UBI insurers can offer lower premiums based on assessing users’ driving behavior data, drivers with high privacy concerns are reluctant to share such personal data. Consequently, these drivers would still adopt traditional insurance. Through an analytical model, we examine the competition between traditional insurance and UBI, and the role of the tradeoff between privacy and premium in the market competition. We also investigate how drivers’ risk difference and market composition of different types of drivers affect insurer profitability and market share. The findings reveal that the increasing privacy cost induces more low-risk drivers to adopt traditional insurance. Traditional insurers benefit from reduced risk difference and concentrated risk distribution, while UBI insurers gain advantages from increased risk difference and a more evenly distributed risk profile. We highlight the significance of drivers’ privacy concerns and aligning insurance premiums with drivers’ risk profiles in market competition.