Some of the most common questions we get from users regarding our car insurance products are to do with pricing. It is also a topic that we have wanted to write about for a while now as there is quite a lot that goes on in the background to get you the price you see in the app.
How does it work?
Firstly, pricing in the car insurance industry is variable and is determined by a variety of information provided by you, the user. All the pricing you see in Cuvva is bespoke to you and is the result of a basic four step process:
Stage 1: user inputs
Inputs simply refers to all the information you provide us. This includes your name, date of birth, GPS location, driver’s license number (DLN) and vehicle registration. At this stage you are effectively telling us who you are and what you want to insure. We’ll explain why in a little bit.
Stage 2: data enrichment
The next stage is called ‘enrichment’. Essentially what happens at this point is us validating all the information you have given us and ‘enriching’ it. We take your name, age and check them against the DLN to confirm they match up. Then, using a service called MyLicence, we contact the DVLA with your DLN to check that you’re eligible to drive and not banned. Finally, we use the vehicle registration to get all the info on the car you want to use.
Stage 3: risk calculation
You might be wondering what we need all this info for? We take all the ‘enriched’ data and apply it to the underwriters rating model. What this means in simple terms is that at this stage we assign all your information a number. The number is the value of how more/less risky you probably are versus other people.
There is a lot going on here but the three main things that contribute to your pricing are age, driving experience and location. Location is very important as that can have a big affect on the final price which often causes confusion with our users. If you use Cuvva in the countryside you will get a substantially cheaper price than if you use it in the city. Some users think the price changes because we have just gotten greedy and increased our prices but what has happened is they have moved from a lower-risk postcode to a more expensive one as the below map shows.
Stage 4: final pricing
In the final stage we simply take all the numbers from stage 3 and multiply them by the base rate. The base rate is the average price as calculated by the underwriter; ours for 1 hour is around £8.00. We then add a commission of 20% and base charge of £1.20, which is how we make money. Finally, we add the commission, base charge and insurance premium tax (IPT), basically the insurance version of VAT, to get the final price. Right now, this is 10% – though the government is clearly on a mission to keep increasing it at the moment! :-/
We have created a handy infographic below which illustrates the whole process using real data based on our CTO James!
The future of car insurance
The current method of pricing is fairly antiquated and heavily relies on assumptions rather than what we actually know. In the future we want to change this to focus on data and for your actual driving behaviour to be the major determinant of your price, rather than more arbitrary factors like age which place you into “buckets” of your peers, but that is a blog post for another time.