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Overview: IoT Project Business Case, Usage Based Insurance

Posted by: Devashish Bhatt On September 30, 2014 06:11 PM

Usage Based Insurance or UBI is a concept which is all set to revolutionize the Auto Insurance sector. Currently the insurance premiums are calculated using demographic metrics. In UBI the current driver behavior is tracked using device installed in the vehicle capturing driver behavior metrics like how far they drive, how often they hard-brake or swerve etc. Using this data along with the traditional demographic metric a unique risk profile is created for each driver.

Research predicts that this is likely to bring down premiums by almost 30% for most car drivers by aligning their profiles to realistic risk levels. The insurance provider also benefits since better drivers are drawn to them due to lower premium. Their customers are incentivized to drive more cautiously in the process, reducing both the risk as well as number of claims.

Case Objective

  • How to arrive at the most affordable pricing for UBI?
  • Ensure stable profitability for the above price?

Categorization of costs for UBI

Fixed Cost: These are onetime cost that needs to be incurred while implementing the UBI solution. By and large these costs are independent of the no. of users and include the following:

  1. Shipping Cost
  2. Launch Cost
  3. Hosting & Software costs
  4. ITSM tool Setup costs
  5. Connectivity (SIM + Activation) Costs
  6. Sales Cost including Marketing events 

Recurring or Monthly Cost: These costs are in the form of monthly subscription cost that needs to be incurred by the insured, in order to be eligible for Usage Based Insurance. Typically this cost includes the following: 

  1. Hosting & Software charges
  2. Operations Cost – for L1, L2 & L3 support for the M2M service lifecycle services ( Activation/Provisioning/Suspension/Re-activation, Testing and Technical Issues/Device Management/Trouble Shooting)
  3. Data Plan, monthly charges for each SIM installed in the device
  4. Product Development Cost split over the 3 years
  5. Public Data Cloud charges

Certain monthly costs like data charges are directly proportional to the number of users but remain the same on a per user basis.

Device Cost: This is the cost which would be incurred on a per unit basis for every device fitted into the car to capture the driver behaviour data. The device has a SIM card installed which subsequently transmits this data which is sued to create the drivers risk profile. Two scenarios have been considered from the device cost perspective

  • Capex Model: in this case the devices are purchased directly from the vendor by paying the full value of each device. There is an initial investment in purchasing the device apart from the other monthly charges
  • Opex Model: in this case the cost of devices is paid by the user in the form of monthly instalments over a period 3 years. This reduces the amount of initial investment to be made and spreads the cost over monthly charges paid.

Other Assumptions:

  • All calculations were done for a volume of 10,000 devices
  • The assumption is to have a 5 year deal with the customer however.
  • A contingency mark-up has been considered for all expenses
  • From year 2 onwards additional costs for replacement of defective devices i.e. buying new ones and their shipping, has been considered.
  • Following activities were considered out of scope:
  1. Bill generation
  2. On field support
  3. Proactive monitoring of implementation

Opex vs. Capex Model

5 Year view of Return on Investment: For the same revenue the opex model provided a more stable Return on Investment. Apart from RoI we also compared these two models on various other parameters such as Break-even Period, Net Present Value & Return on Net Assets.

Head to Head Comparison of Costing Models: Opex Cost model compared far more favourably in almost all the parameters considered. Additionally the opex model should be far more acceptable to both the insurer and the insured since upfront investment in minimal. Also the user would pay on a monthly basis as the benefit of using UBI starts accruing on a monthly basis even though the monthly changes would be higher by about 3 dollars over the capex model.








Only Device

No assets





Not Applicable



RoI variance





Break Even

by 3rd year

before 2nd year





˜ 1.4 times of Capex Model



Upfront Investment


˜ 14% less than Capex Model



Monthly Cost / Device or user


˜ $3 more than Capex Model


 *1) Platform license & Hosting Server are all monthly costs

   2) Device of a value lesser than INR 5000 has not be considered as asset

Tags: Digital Enterprise Services
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