Susan Kuchinskas looks at open niches within the lucrative UBI space
According to Towers Watson research, insurers representing 60 percent 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. (For more on US state regulation, see Insurance telematics: US state regulators tackle UBI.) 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.
The manage-how-you-drive model
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.
American Family Insurance says its Teen Safe Driver Program has helped teens reduce risky driving behaviors by 70 percent. The programincludes a free in-car device attached to the review mirror. When incidents like extreme braking, cornering, and accelerating too fast—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.
State Farm's In-Drive, created by Hughes Telematics and currently offered only in the US states of Utah and Illinois, provides an entrée for State Farm into stronger customer relationships and value-added services competitive with OnStar and motor clubs. It offers one-touch emergency response, roadside assistance, stolen vehicle location assistance, vehicle diagnostic alerts and maintenance reminders, plus parental monitoring tools for location services and speed alerts.
It also includes the MHYD program, Drive Safe & Save. 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.
New revenue streams
While State Farm will provide discounts on rates of up to 50 percent for the safest, lowest-mileage consumers, In-Drive also represents an opportunity for new, recurring revenue streams. The service offers four subscription levels with additional services like stolen vehicle assistance, emergency calling and alerts for events like speeding, with subscription fees from $7 to $22 per month.
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. "Personalized 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 organizations that provide weight-loss and smoking cessation classes to members. (For more on new sources of revenue, see Consumers and UBI: The power of value-added services and Telematics and UBI: How to increase consumer acceptance.)
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."
Susan Kuchinskasis a regular contributor to TU.
For more on insurance telematics, see Special report: Insurance telematics.
For exclusive insurance telematics business analysis and insight, read TU’s Smart Vehicle Technology: The Future of Insurance Telematics report.