Andrew Tolve explores why usage-based insurance is poised for growth in the US, despite low consumer awareness
To the industry optimist, insurance telematics in the US is surging. Progressive, one of the largest auto insurers in America, has launched SnapShot, a pay-as-you-drive (PAYD) insurance program available in two-thirds of the country.
The program tracks miles driven, amount of time, time of day, and speed, and presents it all through an online reporting tool.
GMAC insurance group, meanwhile, offers a Low Mileage Discount to GM drivers who own OnStar and drive less than 15,000 miles a year. The program is available in more than 30 states.
Research from industry analyst Towers Watson suggests that 60 percent of the personal auto insurance market in the US is covered by insurers that offer some form of a usage-based insurance (UBI) program.
Robin Harbage, a director at Towers Watson and a long-time veteran of the insurance telematics space (he oversaw deployment of TripSense, one of Progressive’s predecessors to SnapShot, in its first three states) says that 10 of the top 25 insurance companies in the country have gone public with UBI programs, including Liberty Mutual (Onboard Advisor), State Farm (Drive Safe & Save), and Allstate (Drive Wise).
An additional six of the top 25 are currently piloting programs.
“The data companies collect from these programs can become a competitive tool with potentially huge benefits,” says Harbage. “Those benefits will go to the first movers. The industry is catching on, which is why it’s starting to explode.”
Not yet mainstream
To the industry pessimist, however, it’s a less compelling story. Yes, many auto insurers offer programs in select states, but few, if any, of these programs have become mainstream successes. “Usage-based insurance” or similar terms like “pay-as-you-drive” are yet to enter the popular lexicon in America.
While studies have shown that as many as 30 percent of US citizens would consider UBI offerings, far fewer than that actually know these offerings exist.
State-based regulatory issues make it difficult to roll out nationwide programs and occasionally challenge insurers’ ability to deploy telematics in a useful way on a regional level.
California, for instance, limits the parameters that companies can use in pricing. (For more on regulatory hurdles to UBI, see Telematics and privacy: The impact of ‘do not track’ proposals.)
Furthermore, insurance providers continue to wrestle with practical ways to offset the cost of device acquisition, installation, and operating costs without asking drivers to incur some of the expense.
All of the active programs in the US are currently incentive-based offerings; they provide the possibility of a discount without the equal possibility of a rate increase.
John Canali, senior analyst at Strategy Analytics, says that some people propose “all sorts of funny math to justify” the business case behind insurance telematics in the US.
As device costs continue to decrease and OEMs embed telematics solutions in new vehicles, the business case will grow, but “everything is still in its infancy,” he says. (For more on the business case for UBI, see The business case for insurance telematics is there in the making.)
Connecting the data
One problem that has plagued insurance telematics around the globe is a disconnect between insurers and telematics providers; the latter often struggle to understand what insurers are looking for and how they want data presented.
As insurers in the US experiment with various models and pilots, telematics providers have often been left to guess at what the true business value of their solutions is and what their business propositions should look like. “Insurance companies and telematics providers in the US don’t seem to speak the same language,” says Harbage.
What insurers need for predictive models to price products is often not the same data that telematics companies are accustomed to providing, he explains:
“We spend an inordinate amount of time specifying types of data required and helping device manufacturers clean the data up and get it in a useful format for insurers. It seems like it should be pretty easy to bridge that gap, but it’s not.”
Nonetheless, the telematics providers targeting the insurance telematics space in the US continue to grow. Octo Telematics, the leading provider of advanced telematics solutions to auto insurers worldwide, launched its North America division in May 2011, a joint venture with Directed Electronics. Octo already announced its first customer, Seattle-Washington-based Safeco Insurance.
“We believe that using driving behavior information can optimize the situation for the driver and optimize the situation for the insurer,” says Harald Trautsch, chief marketing officer for Octo Telematics and an adviser to Insurance-Telematics.com, a hub for industry information.
“We look forward to enabling that in the American market.” (For more from Harald Trautsch, see Insurance telematics: Differentiation is at the core of every value proposition.)
Likewise, Hughes Telematics and State Farm announced In-Drive®, which debuts in Illinois and is tailored specifically for State Farm policyholders.
In-Drive offers a variety of safety and diagnostics features, a website and smartphone app for remote and mobile access, and also enables more State Farm policyholders to take part in the Drive Safe & Save program.
In-Drive will provide driving performance data and the customer’s savings will be based on mileage, turns, acceleration, braking, speed and time of day vehicle is operated. The website will showcase where a customer’s discount stands and what factors have contributed to it. Drivers also can receive personalized tips on what they can do to maximize their savings.
In-Drive “could really jumpstart things for insurance companies,” says Canali. “Whether it be smaller insurers or those late to the game, it’s a bit of an equalizer.”
Waiting for a breakthrough
Experts, optimistic and pessimistic alike, agree that the US insurance telematics market is on the cusp of a breakthrough and that several forces could provide the spark to bring it into the mainstream.
First, as OEMs start to embed telematics solutions before cars trundle off the factory line, it helps deflect much of the cost for insurers. That’s why embedded solutions like OnStar have proven attractive to insurers like GMAC and State Farm, whose Drive Safe & Save program is available only to drivers with OnStar activated.
“If you envision a time when cars already come equipped with telematics, it’s ideal for the insurance industry because no one has to worry about hardware,” says Trautsch.
“You simply tell clients they have telematics on board, and they can sign up for these programs. The OEM model makes this very feasible.”
According to management consultancy A.T. Kearney, upward of 40 percent of vehicles in the US made in the 2010 model year have some sort of embedded solution.
If that trend continues, it makes the business case for insurance telematics more compelling.
Second, if UBI programs start to supply data that conclusively enables better segmenting, as Progressive and other insurers hope it will, it will justify the initial hardware and operating costs even if OEMs don’t cover it and could trigger broader rollouts.
When Progressive began using credit scores as a rating segmentation tool in the 1990s, the company claimed a large US market share and grew rapidly until competitors caught on. The data that comes from UBI programs is arguably more valuable for segmenting than credit scores.
“We’ve proven that gender, marital status, and credit scores can be predictive, which is helpful for insurers, but driving behavior is much more intuitive to consumers as a rating variable,” Harbage explains. “That’s a huge benefit.”
It’s particularly beneficial in a country like the US. Once American drivers know these programs exist, they likely will think they can profit from them.
“In theory, I would think insurance telematics would run into a serious problem of self-selection where only good drivers elect to have insurance-based telematics,” says Canali.
“The problem is, most Americans think they’re really good drivers and really safe drivers. “It may sound bad,” he concludes, “but the over-confidence of drivers in America is beneficial to the long-term viability of insurance telematics in this country.”
Andrew Tolve is a regular contributor to TU.
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