Siegfried Mortkowitz looks at the prospects of usage-based insurance reaching its tipping point in the U.S. market, what is driving the solution as well as the obstacles still to overcome.
If few people in the U.S. car insurance market still harbor any doubts that telematics will eventually become an essential tool in rating risk and pricing, and that usage-based insurance (UBI) will ultimately become the dominant auto insurance solution, we are nevertheless still some distance from realizing that vision.
The so-called tipping point for UBI has been set at 5% market penetration, beyond which point the solution will be considered a mass market product. While most available data suggests it is definitely moving in that direction, lingering reservations among both consumers and insurers are impeding UBI’s march to the mass market.
The question for insurance companies is how to hasten the inevitable and bring UBI to the tipping point and beyond.
According to Anthony Largo, Director of Commercial Auto Telematics at Liberty Mutual, UBI “is getting [to the tipping point] by discounts which are being paid for by retention, of it becoming a lifetime product.”
This statement is supported by a 2013 survey conducted by the independent research firm Lynx Research Consulting for LexisNexis Risk Solutions, which found that discounts are the number one driver for UBI enrollment. In the study, 50 percent of respondents said they would likely sign up for a 10% discount, while 36% said they would actually change carriers for the same discount. And the higher the discount, the larger that number grows.
The Progressive Solution
But are lower premiums enough to sell an insurance solution that not only disrupts the business itself but asks consumers to buy a product that requires new technology in their cars, collects and transfers data about their driving behavior and locations and judges their driving ability?
Apparently, a simple but informative marketing message and hard work are also necessary, to judge by the success of one U.S. insurer, Progressive, the undisputed market leader in UBI.
The company’s success has made it a model for other carriers looking at putting a UBI solution on the market. With approximately 2 million vehicles enrolled in its Snapshot product and some $2 billion in customer revenues, it’s safe to say that Progressive’s strategy has serious implications for the future of UBI.
But Progressive’s UBI success did not happen overnight. Far from it, says David Pratt, the company’s general manager of Usage-based Insurance. “We’ve been working with it for a long time,” he says. “We did our first pilot in 1998, in Houston.”
One of the technological challenges was to come up with a simple device that the customer could easily attach to an OBD cord, he explains. It was not until 2011 that Progressive started advertising its Snapshot solution.
Many people credit Progressive’s advertising campaign for the product’s success, suggesting that a good marketing campaign is essential to bringing UBI into the market mainstream.
“Our advertising was designed to explain the new idea,” Pratt explains. “The idea was that you plug the device into a car and prove you’re a good driver. And that will reduce your premiums.”
The LexisNexis study found that this was a sound strategy. At the time of the survey, in early 2013, 35% of consumers were aware of UBI or telematics, compared to a mere 10% in 2010. This means that Progressive launched its UBI solution in relatively uncharted territory.
The study also found that 78% of respondents said they were aware of Progressive, a far higher number than any other insurer, testimony to the effectiveness of the marketing campaign.
Progressive’s ads also told consumers that the traditional method of premium pricing was not fair, because good drivers were paying for bad drivers. “We told them, ‘This is a really good idea. It is more fair’,” Pratt says.
Progressive’s “Rate Sucker” TV ad conveys this in a simple, brief and humorous way.
The ad portrays bad drivers as zombie-like individuals who cling to the cars of good drivers by the suction of their lips. Its message is: “Their bad driving makes car insurance more expensive for the rest of us,” and urges themto “Stop paying for rate suckers!”
According to Pratt, the focus of the ad was intended to educate consumers about both traditional pricing methods and the advantages of Progressive’s UBI pricing. “We did a survey and found that two-thirds of people didn’t know that they were paying for bad drivers,” he says.
Progressive saw that providing clear information attached to a simple message – we can save you money – was key to their strategy. As Pratt puts it, “Because this was a fairly new product, our ad campaign is really an education campaign.”
Interested consumers are then told to go to Progressive’s website, where they are provided with practical information regarding Snapshot and telematics, such as how to plug in the Snapshot device and what data it collects.
“By creating awareness and understanding of the product, we will get more customers,” Pratt says. “The marketing challenge is how to make people understand that UBI individualizes.”
One crucial element of the success of Progressive’s UBI solution was the company’s early and continued commitment to the product. Pratt says the company believed in the product from the start.
“We just thought it was such a good idea for customers,” Pratt says. “If you could measure how people actually drive, it would be a more fair way to rate drivers.”
In addition, Progressive also showed its commitment by inesting a lot of time into developing the right product. As Pratt put it, “If you want to innovate, you have to keep trying and you have to experiment.”
But not all carriers share Progressive’s enthusiasm for UBI and its marketing boldness. According to John Heffernan, AVP/Director, Standard Lines Strategic Initiatives at State Auto Insurance Companies, UBI market growth has been stalled by “industry inertia” caused by “how formidable entry to this market can be.”
David Lukens, director of Vertical Marketing at LexisNexis, agrees with this assessment. “Insurers have to take the plunge,” he says. “A lot – about 70% of carriers – are experimenting with small sampling.”
But such small-scale trials are not sufficient to get learning about the space, he cautions. “Getting enough data is critical. A carrier needs experience with enough people.”
While Lukens suggests that cost is an important inhibiting factor for some carriers, Heffernan maintains that going to UBI is disruptive. He compares launching a UBI solution with the initial implementation of credit scoring. “That was just another rating component– pretty straightforward,” he says. “When talking about UBI, pushback from the market is far greater. Without an understanding of the potential benefits, many consumers view UBI as being far more intrusive.”
One reason is that implementing UBI requires significant changes in the way an insurance company does business. “It’s a formidable challenge to implement UBI,” explains Heffernan. “It has a big impact on the entire organization, and the entire organization must buy into it.”
Another reason for the pushback, he says, is that “it changes the waya carrier can interact with their customer. Once they enroll, it’s more than just issuing a policy. Telematics becomes another customer touch point – in fact, [it has] the potential for many new touch points.”
He notes that before UBI the only customer touch point was the bill. “With UBI, insurers have an opportunity to interact every time you get into the car. It’s another dynamic.”
While the new touch points enabled by UBI provide opportunities for both the insured and the company, they can, and will, be deemed intrusive by some consumers if not managed properly, Heffernan cautions, adding: “Finding the balance between customer needs, wants and interests and the company’s desire to push their brand is critical.”
Consumer fears about their privacy have not been helped by rather sensationalist media stories about UBI and the data it gathers, says Heffernan, citing a recent newspaper headline that read: “Car Insurers Want to Track You Even More – and You’re Going to Let Them.”
This is why, like Progressive’s Pratt, he believes that it is essential to UBI market growth for carriers to educate the consumer about the solution. “We have to tell them what’s in it for you Rather than being Big Brother, it’s going to enable you to become a safer driver.“
“Our industry’s primary challenge is to engage our customers, to entice them, to get them to use it the first time,” he says. “The market is growing, but industry commitment is tentative.”
State Auto is currently building an infrastructure that will enable them to pursue opportunities across all auto lines of business. “We have to put together an infrastructure to leverage all this incredible technology coming into the space,” he explains. “You need to position yourself to leverage the constantly changing and improving technologies.”