John Hendel explores how US federal and state regulations can help create new business opportunities for usage-based insurance
One of the most complicated factors when discussing usage-based insurance (UBI) in the US is regulation, both state and federal, and its role in permitting telematics-powered UBI. Often regulation is seen as a hindrance, a force that blocks and frustrates insurance companies trying to adopt new business models. States differ from one another and from the federal government in terms of regulation. But contrary to popular belief, many state regulators and federal programs are actively encouraging UBI, and regulation—from tax credits to the coming Highway Bill—can create new business opportunities.
In the insurance world, every major company is vying to find the next competitive edge—and that edge may be UBI. According to a personal-lines insurance company actuary and telematics expert who preferred not to be named, UBI promises to be “the next opportunity for a company to really differentiate itself from the pack,” similar to the use of credit scores in the late 1990s.
Dave Huber, vice president of insurance telematics for GMAC Insurance, agrees, emphasizing that the real benefit would fall to those who implemented UBI early.
States and regulation
Acceptance of UBI options often rests on the presence or lack of GPS in the systems. People have concerns about the intrusiveness of UBI and the way that tracking driver behavior affects driver privacy. Of most concern is the notion that GPS-based UBI would be used to track driver locations. In preliminary models, the emphasis has been on sharing mileage data and never location. (For more on privacy concerns, see Telematics and UBI: How to increase consumer acceptance .)
Upwards of 30 states have approved pay-as-you-drive (PAYD) models, but many still fall short of allowing GPS to enter the picture—none as notably as California. (For more on UBI in California, see Telematics and privacy: The impact of ‘do not track’ proposals.)
California has posed its own regulatory challenges for certain insurance companies. As Huber explains, “There are some regulatory and filing issues that need to be resolved” in the state. The insurance company senior actuary says he wouldn’t use California as an example of how UBI has made progress at all.
“We wanted to start with mileage,” explains Adam Cole, general counsel for California’s Department of Insurance. He observed the resistance of insurance companies to requirements and mandates but adds that he considers the California story a success. The state did allow insurance companies to begin using mileage in PAYD models and created the appropriate regulations, even in light of the state’s sensitivity over some of the issues.
The shift to UBI
President Barack Obama’s agenda initially included a six-year approach to renovating America’s highways, amounting to $500 billion in improvements. These dramatic improvements could, if integrated with UBI goals, help craft an infrastructure more conducive to UBI, with the technology required to assess and collect data on driver behavior integrated with the highway infrastructure in a seamless way. Tax credits could also create additional incentives for people to shift to a real-time UBI model faster.
Federal regulation on UBI also has the potential to streamline how states receive UBI. The US Department of Transportation has already voiced thoughts on telematics in the past. Ray LaHood, the US Secretary of Transportation, has, for instance, objected to too many driver distractions and called for study of how infotainment could put drivers at risk. In June, he told the Wall Street Journal he didn’t see why anyone would “download their Facebook into the car.” His very concern with safety, however, may lend itself well to support for UBI, which offers incentives for driving less and driving safer.
So far, the budgetary battles in Congress have put a halt to the Highway Bill, but the general signs are positive. “The federal government is supportive of UBI, and 29 states have three or more UBI programs active,” says Stephanie Stevens, director of marketing and development for LexisNexis, which has conducted research on consumer acceptance of UBI.
Kick starting PHYD models
Currently, there are various opportunities for insurance companies to offer their drivers discounts for lower mileage. GMAC and others have rolled out pay-how-you-drive (PHYD) models, in which drivers can report their mileage to insurance companies either by self-report or through OnStar. Many insurance companies criticize this for falling too short of a real UBI model.
One of the shortfalls of current models, however, is the emphasis about how UBI affects good drivers and the discounts they can receive from a mileage-based or UBI system, without attention to how UBI should affect bad drivers. “Can we raise someone’s rates due to UBI?” says the insurance company senior actuary. “Right now, regulators seem to be overwhelmingly in favor of lowering rates for good UBI, but why the reluctance to raise rates for poor UBI?”
The insurance actuary suggests that regulations could provide a valuable communications role in shifting people’s thinking from PAYD to PHYD—a model that would take a driver’s full behavior into account, for worse as well as for better. (For more on PAYD and PHYD, see The business case for insurance telematics is there in the making.)
The need for partnerships
Before UBI options can become mainstream, though, the value chain surrounding UBI must be optimized, with the relevant industries learning the right lessons for a full consumer rollout. This process will take at least two to three years, most likely, according to Stevens. One critical part of preparing for UBI is establishing the right industry partnerships.
“A trusted provider that can provide data aggregation, storage and analysis is essential for not only maximizing the value of a UBI program,” says Stevens, “but also for addressing privacy and security concerns through proactive and proven methodologies.” For his part, Huber doesn’t expect this infrastructure to properly develop for more than half a decade.
The insurance actuary calls for more streamlined definitions of terms like UBI and PAYD, saying the market will need them as options expand. The actuary points to places where the model has already moved past the mileage-based version of California, such as All-State’s Drivewise program in Illinois and Progressive’s Snapshot program, used in more than 30 states.
Snapshot already registers certain driver behaviors, like the time of day of driving as well as how often a driver makes sudden stops. It relies on an after-market telematics device installed in the car to pull this data. From a regulatory as well as infrastructural standpoint, the market is opening to UBI. “The safety benefits of UBI and the societal benefits of accident reduction, emission reduction, and fuel savings are being recognized,” Stevens explains.
John Hendel is a regular contributor to TU.
For exclusive business analysis and insight on insurance telematics, check out TU’s Smart Vehicle Technology: The Future of Insurance Telematics.