Telematics promises to be a game changer in the Canadian auto insurance industry, but it’s early days and challenges abound. In the first of a two-part series, Brendan McNally reports.
For as long as anyone can remember, automobile insurance has been the pillar on which the Canadian property and casualty insurance industry rested.
And for a good reason.
Canadian automobile insurance is among the most expensive in the world – the result of high accident rates, lack of competition in the Western provinces and widespread insurance fraud in Ontario. In 2011, automobile insurance accounted for 50% of total property and casualty premiums.
But that pillar is starting to lose some of its strength – due to a mixture of telematics and politics.
In May, Desjardins Insurance introduced Ajusto, a usage-based insurance (UBI) program, one of the first such programs in the country, offering drivers in Quebec and Ontario the opportunity to get up to an additional 25% off their premium – on top of existing discounts.
To determine a driver’s savings, an Ajusto OBD2 dongle installed in the vehicle measures distance travelled annually (up to 10% off), extent and frequency of hard braking and acceleration (up to 10% off), and the time of the day the vehicle is driven (up to 5% off).
In October, Ontario Premier Kathleen Wynne upped the ante at the Insurance Brokers Association of Ontario (IBAO) Members’ General Meeting by calling for a 15% auto insurance rate cut and reaffirming her government’s commitment to combat insurance fraud.
And, at almost the same time, Intact Insurance and belairdirect, two of Quebec’s biggest insurers, announced plans to offer UBI solutions to Quebec drivers, while two Ontario carriers, the IBAO-owned Independent Broker Resources (IBRI) and CAA South Central Ontario, announced they were partnering with British insurance technology house Quindell to offer UBI solutions of their own.
The compelling case for UBI
There is no arguing that using telematics to monitor driving behavior and providing feedback improves driving, saves lives and money.
In Iceland, the postal service reduced its crash rate by 56% using telematics. In Britain, a telematics scheme for teenage drivers called “insurethebox” reduced youth crash rates by 35% to 40%.
It is also generally believed that safer driving reduces fuel consumption by 10%, on average.
And although UBI is a relative newcomer to Canada – it is more widespread in the United States and the United Kingdom – the IBAO and other Canadian industry watchers believe that between 10% and 30% of all Canadian auto insurance policies will be telematics-based by 2020.
According to Paul-André Savoie, president and CEO of Baseline Telematics, UBI creates a “huge financial incentive” to drive safely. “We are attracting safer drivers and rehabilitating other drivers,” he says.
UBI also has the potential to make for pricing models that are much more accurate and transparent, particularly in Ontario where insurers are obligated to share with drivers the data they collect.
(In 1989, Canada ranked the fourth highest for automotive fatalities among industrialized nations. Since then, the number of road fatalities has steadily declined. But it is still high, particularly among young male drivers. In the Western provinces of Saskatchewan, Manitoba and British Columbia, insurance rates are high because automobile insurance programs are government-administered and, therefore, lack competitive pressures to lower rates. In Ontario, insurance rates remain high because of widespread automobile insurance fraud.)
Scoring risk before UBI
Before UBI, whenever an insurer signed up a driver for a policy, the risk got calculated based on the driver’s previous driving record and a wide variety of proxies, including age, gender, the distance from the driver’s home to his job and the hours of the day or night he was likely to drive.
Other, quite often wholly unrelated strands of information, such as credit rating and highest educational level completed, also got factored in because they too were considered potential indicators.
The only hard data an insurer actually had to go on was the number of accidents and driving tickets the driver had amassed.
Telematics changes all that.
The tracking devices, which UBI insurers are now installing, are capable of recording a broad range of behavioral information, such as the number of hard braking or sudden acceleration incidents, the number of miles driven, and the time of day that the driving took place.
From these, insurers can calculate with far greater precision how good a driver they are dealing with.
Another great thing about UBI programs is that they are self-selecting. Adult drivers sign on because they already see themselves as good drivers, and many are also motivated to keep improving their driving. In essence, insurers are helping themselves to the cream of the crop.
If the insurer can keep them, he’ll have a customer base of drivers who rarely get into accidents, and even if they’re paying lower premiums, they make the insurer more money.
But it’s not that simple.
To begin with, insurers need to acquire the equivalent of 100,000 years of driving data to establish the actuarial data needed verify their UBI pricing models. This will take several years to amass. And while it is possible to use similar data already gathered by U.S. insurance companies, the insights don’t accurately apply to the Canadian situation.
For example, the road surfaces are not always the same, and the ratios of urban-to-rural areas are different.
Another problem is privacy. A 2012 phone survey of existing customers conducted by Progressive, one of the largest U.S. insurers providing UBI programs, found that 40% were adamantly opposed to having telematics devices installed in their cars. In another survey by Deloitte of 768 Canadian home and car insurance policyholders, 61% said they were opposed to telematics devices in their cars. When asked why, 63% of this group said it was based on privacy issues.
From a regulatory standpoint, privacy is, in fact, a much bigger issue in Canada than it is in the United States. In both Ontario and Quebec, regulators require that insurance companies running UBI programs not have direct access to the raw data being collected from each driver.
In the UBI program which Desjardins is running in Quebec and now Ontario, the raw data goes to iMetrik, an independent company, which performs the necessary scoring.
Also, unlike in the United States or anywhere else for that matter, in Canada, the driving data is made available to the customer, which he or she can then take along to other insurers when shopping for a better rate.
(Return next week for the second part the series.)
Brendan McNally is a regular contributor to TU.
For all the latest telematics trends, check out Telematics for Fleet Management Europe 2014 on March 12-13 in Amsterdam, The Netherlands, Content and Apps for Automotive Europe 2014 on April 8-9 in Munich, Germany, Insurance Telematics Europe 2014 on May 6-7 in London, Telematics India and South Asia 2014 on May 28-29 in Bangalore, India, Insurance Telematics Canada 2014 on May 28-29 in Toronto, Telematics Detroit 2014 on June 4-5 in Novi, Michigan, and Advanced Automotive Safety USA 2014 on July 8-9 in Novi, Michigan.
For exclusive telematics business analysis and insight, check out TU’s reports: Telematics Connectivity Strategies Report 2013, The Automotive HMI Report 2013, Insurance Telematics Report 2013 and Fleet & Asset Management Report 2012.
May 2014, Westin Prince Hotel, Toronto
Laying the Foundations for Insurance Telematics: Utilise UBI Data & Get Up to Speed with Regulations to Entice Consumers