Although usage-based insurance (UBI) is not yet widely available – or even widely known – it is currently being widely researched and tested by insurance carriers. UBI comes with real costs, and the technology and business models are still developing, so early adopters need to focus their investments
John Canali, an analyst with Strategy Analytics, notes that a key disconnect persists around UBI. “Insurers, OEMs, and wireless carriers are not aligned,” he says. But waiting until all the kinks have been smoothed out may mean missing opportunities. So, when developing UBI business plans, balance urgency with strategy.
Gathering and managing the data that make UBI possible is also what makes it so costly, particularly at the start. Whether created and managed in-house or via a partner, the in-vehicle devices UBI requires are expensive, and it may be a while before increased demand drives down component prices.
A second cost consideration is how to analyse incoming data. Although analysis is already part of an insurance company’s protocol, UBI may generate data at an unprecedented level. Translating all that data into usable information will take added effort.
However, the biggest benefit a UBI program offers insurance carriers is the “opportunity to create a customer experience with auto insurance,” says Inquimboy. Right now, auto insurance is merely transactional.
NOBODY WANTS INSURANCE
“Insurance is basically a product nobody really wants,” adds Canali. “You’re paying for a product you don’t use, or you’ve been in an accident and are unhappy about that.” However, UBI opens the channels for feedback and gives carriers an opportunity to interact more frequently with customers as well as perhaps to improve their driving behaviours.
The other big benefit is more effective pricing. UBI gives drivers more control over their premiums and allows the insurer to create more pricing segmentation and better accuracy, by using the customer’s actual driving behaviour as the basis for rates rather than proxies like driving record and number of tickets and accidents. Canali points out, though, that “the insurance industry has been profitable because pricing is adjusted to the driver,” and the information companies are currently able to gather is working pretty well.
UBI could also benefit mobile phone carriers interested in expanding into machine‑to‑machine (M2M) communications, notes Canali. He anticipates that consumer data plans will eventually be shared across devices, perhaps including cars, where UBI apps could feed information back to the insurer.
Despite these benefits, UBI is not a sure‑fire win, nor is it likely a good fit for all auto insurers. “There are definitely some risks,” says Inquimboy. Insurance carriers looking to write policies for ‘preferred business’ may find UBI a compelling model, as it can help with customer retention. However, if a company is focused on the ‘high turnover’ part of the market, UBI is “not the wisest initiative because it’s a capital-intensive program,” he says.
With those points in mind, Inquimboy reasons that companies interested in UBI shouldn’t wait too long to get a program started. Otherwise, they may experience “adverse selection” and be left mostly with customers who don’t suit their pricing model.
Canali adds that once a company has decided to venture into UBI, it needs to research carefully and be sure it chooses the right partners to help deliver and enable the service. “I don’t believe many insurers understand enough about automotive” to manage UBI data effectively on their own, he says.
The best way to enhance the future of UBI is for OEMs, wireless carriers, and insurers to work together, suggests Canali. But with differing agendas and concerns among these businesses, this is could be easier said than done. He cites Verizon’s recent acquisition of Hughes Telematics as something to watch as a gauge of the industry’s comfort with such combinations.
“OEMs and carriers need to sort out their relationships before they aggressively court insurers,” he says. But once they do, they could be well positioned to offer their own insurance. In addition, as OEMs and insurers begin to collaborate on UBI, Canali wonders whether OEMs risk alienating consumers by working with specific insurance companies. E F Despite the challenges, Esurance’s Inquimboy believes UBI has the potential to become an industry standard and a “permanent fixture as an option” among insurance models. Esurance is currently running a UBI pilot program in Arizona.
“So far it presents a very compelling case,” he reports. “If we decide to move forward, we can roll it out very aggressively.”
SPECIFIC BUSINESS MODELS
According to Towers Watson research, insurers representing 60 per cent of the personal auto insurance market have implemented a version of a UBI program in at least one state. Many more are running or preparing to run internal UBI pilots. And Ptolemus Group forecasts more than 100 million vehicles will be insured with telematics globally by 2020, generating premiums of approximately $60 billion.
The advantages for consumers and insurers are clear: more accurate ratings of risk factors will lead to lower claims and lower premiums for safe drivers. Technical barriers to these offerings are minimal, but the industry will need to appease consumers and regulators.
Many US insurers offer pay-as-you-drive (PAYD), also called usage-based insurance (UBI). This option is available in the majority of states. These plans use a plug-in device to measure actual miles driven: the less you drive, the less you pay for insurance.
Progressive’s PAYD program, SnapShot, provides a free device that drivers plug into their cars for six months; after that, they send it back and the rate based on miles driven is finalized. State Farm’s Drive Safe & Save program uses OnStar to validate mileage, and it just inked a similar deal to let consumers transmit mileage info via Ford Sync.
Because insurance rates have long used driver-reported mileage as one rating factor for evaluating risk and setting rates, PAYD is a relatively easy product to get approved by state regulators. Each state in the US regulates auto insurance independently. It also makes sense to consumers, because they’re used to this metric. And it doesn’t raise privacy concerns.
Things get more interesting, and potentially more lucrative, when insurers use additional ratings factors that allow them to better calculate an individual driver’s risk. Telematics devices incorporating accelerometers and other sensors can provide accurate information about driving style that could impact a consumer’s risk profile. So-called pay‑how-you‑drive (PHYD) schemes use a variety of factors, including speed, time of day, braking, acceleration and cornering, to paint a more accurate picture.
State Farm’s PHYD plan is called In-Drive, and it uses a device created by Hughes Telematics. In-Drive has rolled out in Illinois and Utah, with more states in the offing. “Obviously, mileage is a good predictor,” says Dick Luedke, spokesman for State Farm. “The more miles you drive, the more likely it is you’re going to file a claim.”
State Farm did quite a bit of testing to find what other factors would be most useful for rating an individual’s risk by installing the devices in the cars of associates across the nation. The secret sauce, of course, is the algorithm each insurer uses to weigh all these factors. Each firm guards them as trade secrets. Luedke says drily, “I doubt we’d be too specific.”
Simply gathering data from telematics devices is not that difficult. Doug VanDagens, director, Connected Services Solutions at Ford Motor Company, says that, while the agreement with State Farm calls for only transmitting mileage information, Ford already can technically accommodate transmission of any metric needed for PHYD. In fact, Ford’s Crew Chief product for fleets, powered by Telogis, provides information on braking, acceleration, maintenance warnings and more.
“Anything happening in the vehicle, we can communicate outside of it,” VanDagens says. It’s easier and cheaper to do so via Sync, he points out, because Sync uses the driver’s cell phone for connectivity. “We can provide all of that relatively easily, as soon as insurance companies want to set up the programs.”
Insurance companies want to take the lead in marketing and managing UBI services. It makes sense since they already have familiar brands as well as the customer base. Most important, they are the ones with relationships with state regulators, keeping track of the myriad regulations and requirements of individual states. As consumers get more comfortable with these products, they may shrug off the Big Brother warnings and embrace the manage‑how‑you‑drive (MHYD) model. With MHYD, drivers get feedback that helps them improve and potentially lower their rates.
REDUCING RISKY BEHAVIOUR
American Family Insurance says its Teen Safe Driver Program has helped teens reduce risky driving behaviours by 70 per cent. The program includes a free in-car device attached to the review mirror. When incidents like extreme – as well as actual crashes – take place, it saves eight seconds of footage prior to the mishap and the four seconds after it. The information is transmitted wirelessly to American Family’s data center for review by driver coaches.
Parents get a weekly driver report card that measures the teen’s performance against safe driving objectives and peer averages. They can log in to see the report, watch video of incidents, and get tips for safer driving that they can share with the kid.
Tim Moroney, insurance regulatory attorney with the law firm of Barger & Wolen LLP, thinks these services can help insurers get off the rate-cutting treadmill. “Personalised automotive insurance is very competitive,” Moroney says.
“While cheaper premiums are usually the biggest hook, by coupling services with telematics you can offer more things. Insurers are now offering concierge benefits. They can do all things automotive and be very creative.”
Insurers could take it even further by offering classes, content, applications and third-party offers. The strategy could be similar to that used by health maintenance organisations that provide weight-loss and smoking cessation classes to members.
Says Frederic Bruneteau, managing director of Ptolemus Consulting Group, “Thanks to insurance telematics, the insurer can become an insurance service provider. Today, the notion of insurance is, ‘They take your money and then you hear from them if you have a problem.’ With telematics, they have a real‑time relationship with any policy holder.”
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