John Hendel reports on how insurers are looking to enhance consumer acceptance of usage-based insurance
Imagine a world in which your auto insurance comes not from prepaid traditional means but through real-time monitoring, mileage, behavior, and other factors that better reward safe drivers. The telematics market sees this reality emerging within the next decade, and investment is shifting across the board to prepare, both in terms of infrastructure and—perhaps most importantly—in terms of the attitudes of drivers toward usage-based insurance (UBI).
Some insurance options already have begun to veer from traditional ones. GMAC Insurance offers a special discount for customers in upwards of 30 states who report their mileage through OnStar. This pay-as-you-drive (PAYD) model still falls short of a full UBI option, according to GMAC. The company is looking at ways to better assess risk and determine insurance premiums through real-time observation of driver behaviors via GPS, accelerometers, and other devices.
Three big potential obstacles stand in the way of telematics-powered UBI entering the marketplace more broadly: privacy concerns and consumer acceptance; state regulations, which vary wildly and can create significant red tape for insurance companies; and who will pay for the necessary upgrade in equipment. Regarding privacy, “Consumers don’t want insurance companies keeping track of where they go,” observes Clem Driscoll of consultancy Driscoll & Associates. Consequently, many of the PAYD models explicitly ensure that they do not track customer locations and only process data about the car’s mileage. The question of UBI’s intrusiveness lingers, though, especially in states like California, which currently doesn’t support the use of GPS for insurance purposes. (For more on privacy concerns, see ‘“Usage-based insurance must move to a broader consumer model”’ and ‘Aviva: Insurance telematics needs “a cultural change in the way individuals view monitoring”’.)
Yet not everyone agrees that privacy is such a big hurdle. “In my opinion—and speaking more for myself than GMAC—privacy concerns are one of the myths of UBI,” says Dave Huber, GMAC’s vice president of insurance telematics. No one has ever come to him worried about privacy, he says. The programs are voluntary, and he doesn’t regard privacy as an issue that will pose a real concern among consumers, though he does acknowledge that transparency is key. Regulation, on the other hand, is a potential obstacle, according to Huber, citing as examples the way California limits GPS and forces insurance companies to price their services.
Adam Cole, general counsel for California’s department of insurance, describes the issue of GPS as “very sensitive,” emphasizing the cautious steps California has taken in adopting new models of insurance pricing. Companies stepped forward with PAYD models around late 2007, Cole says, and the state has approved three of four. Two adjust their premiums based on driver-reported mileage, though State Farm, like GMAC, utilizes OnStar to determine divers’ mileage and adjust premiums. (Huber stresses the importance of verified mileage over reported mileage.) But not everyone is interested in UBI, Cole points, noting that rural residents drive more and would be unlikely to benefit from PAYD mileage discounts.
Driver acceptance of behavior monitoring
The consensus among many of the market players today is that GPS-tracking and some form of telematics-based UBI will become more commonplace with time. Drivers will come to accept the idea of behavior monitoring and mileage tracking as cars come equipped with more infotainment options. The advance of social media could accelerate this trend; younger people already willingly share more and more information, including their location through social media sites such as Foursquare.
Environmental groups have also pushed for UBI, Cole says, since they support the idea of driving less. Companies like Verizon and Sprint avidly watch UBI developments, as do credit bureaus and other institutions that would crunch the numbers, since they could capitalize on the amounts of data that would need to be moved once a model is properly implemented.
The moment when cars come equipped with the right equipment will greatly facilitate insurance companies shifting to UBI plans. For now, any company that wants to do real-time monitoring of behavior needs to invest in after-market solutions. Huber suggests smartphones might even accomplish this, noting the economics of OEM-installed telematics far exceed those of after-market solutions.
Data confirms the potential market opportunity of UBI. More than 75% of policyholders would opt for a telematics program if they could lower their premiums, LexisNexis found in a June 2010 survey of more than 3,400 policyholders. Many also felt that driving behavior should affect premiums; 57% thought actual driving data should be used, with 80% thinking tailgating should affect insurance rates, and 59% comfortable with miles driven per year as a factor. Yet consumers also had their limits, as more than half of respondents did not want minor speeding infractions of, say, 5 miles-per-hour over the limit hurting their premiums.
The trucking industry and fleets accepted the idea of GPS tracking much more easily than the commercial vehicle market. When shipping cargo, businesses have long understood the competitive advantage of installing GPS and having various trucks tracked. A company tracking its trucks can operate with greater efficiency and productivity, says Driscoll: “A real trend on the fleet side is driver-performance monitoring, which ties directly into assessing risk.” More than 250,000 companies make use of such mobile resource management technology, and C.J. Driscoll & Associates expects there will be as many as 6.85 million units out there by the end of 2013. Accelerometers are becoming standard devices, too. (For more on UBI in fleets, see ‘How to make insurance telematics work in the fleet space’; for more on resource management, see ‘Telematics and mobile resource management: Boosting the bottom line’; for more on telematics and cargo, see ‘Telematics in Brazil: Ensuring security for cars and cargo’)
Reducing risk, reducing premiums
People can reduce their risk, says Stephanie Stevens, director of marketing and product development at LexisNexis, by “driving at or near the speed limit, limiting hard braking, not driving between midnight and 4 a.m., not having jack-rabbit starts from intersections, and driving fewer miles.” Safe behaviors such as these can allow drivers to cut their rates by 30%. “We concluded that consumer awareness is key to successful adoption of UBI programs,” Stevens explains about the survey, “and that consumers are interested in opportunities to save money on their car insurance with UBI programs.” Insurance companies shouldn’t expect a silver bullet but should roll out a suite of options to suit different tastes, she suggests.
Huber believes UBI will become mainstream as cars’ infrastructures and people’s attitudes change. But, he notes, “You don’t want to be the last guy to do this.” Offering UBI, at present, lends an insurance company a competitive advantage due to the discounts offered to safe drivers; it’s an “acquisition strategy” for customers, according to Huber. The first companies to enter the market will get the safer drivers with the least risk. Safe drivers will be the ones motivated to opt into a UBI system first, and the late adopters will end up with the highest-risk drivers through adverse selection.
Beyond that, though, Huber says UBI creates a more efficient and more accurate insurance market—a world where rates aren’t underpriced or overpriced. “For an insurance company, this is just a better way to skin the cat,” he says.
John Hendel is a regular contributor to TU.