Driving on Display

Recent reports from industry observers suggest usage-based insurance (UBI) is gaining a strategic foothold in many global insurance markets. UBI programs typically feature a telematics device that can be plugged into a vehicle’s diagnostic on-board computer to track mileage and driving habits. The actual telematics device is a small gadget about the size of a thin mobile phone that plugs into the vehicle onboard computer through the diagnostic port, usually under the dashboard. It measures how often, how and when the vehicle is driven, and stores information about acceleration and braking. It does not record where the vehicle is driven, although some UBI programs also include a GPS tracking device. Data is captured and sent back to the insurer for analysis, with safety ratings and performance usually shared with customers via secure web portals.

UBI programs are proliferating in many countries after years of trial and error. “There are weekly announcements of new telematics-based offerings,” says Catherine Stagg-Macey, senior vice president with Celent and author of the January 2011 report Telematics-Based Insurance: Has Its Time Finally Arrived? “Some big names are placing their reputations on the line. In our view, the barriers are no longer around the technology but rather the customer’s appetite. The question remains: can insurers make this an interesting proposition for the customer?”

In a credit outlook report published in December 2011, Moody’s Investor Services noted that “adopting UBI sooner rather than later will not only attract better drivers willing to participate, but will also allow carriers to build and maintain a database on numerous variables that influence loss costs.”

Towers Watson, which closely tracks the UBI market, says insurers representing 60% of the U.S. personal auto insurance market have implemented a version of a UBI program in at least one state. That translates into about 55% of the top 20 American private passenger vehicle insurers offering some kind of telematics service.

“While UBI is active in many parts of the world, I think North America is the hub of activity,” says Robin Harbage, director of global marketing of UBI for Towers Watson. “I would be very surprised if we don’t see ubiquitous UBI programs in the U.S. within two years.”

Several brand name insurers in the United States have rushed to embrace telematics following the lead of UBI pioneer Progressive Insurance Company. Progressive’s Snapshot program is now available in 39 states. The Hartford Financial Services Group is the latest insurer to launch a telematics program called TrueLane, which will be rolled out this year. Other UBI offerings include Allstate’s Drive Wise, Liberty Mutual’s Rewind, State Farm’s Drive Safe & Save and Travelers’ IntelliDrive.

The Canadian Experience

Yet in Canada, the pursuit of telematics solutions does not match the enthusiasm or activity south of the border. The first insurance company to offer a pilot on UBI, Aviva Canada, quietly disbanded its Autograph program in August 2011 after five years in operation.

“We certainly learned a lot about what a telematics solution could look like in this market,” says Aviva Canada spokesperson Glenn Cooper. “We believe telematics does have a future role, but the main issue is cost. Unless the cost equation shifts significantly, we think there will be limited take-up in Canada.”

Harbage says Towers Watson offers specialized consulting services to help insurance companies find cost-effective UBI solutions. It is working with nine of the top 25 U.S. private-passenger auto insurers and two of the top five Canadian insurers on UBI. Harbage notes that another Canadian insurer has requested a proposal on developing a UBI program.

Towers Watson also offers a program called DriveAbility, which provides analytical support for insurers with UBI programs and an individual score for each vehicle for policy rating purposes. Currently, 18 North American insurers are getting advice from Towers Watson on their UBI programs, including one Canadian company that signed on in January.

“I think you could expect to see at least three or four Canadian UBI programs in the next two years,” says Harbage, who did not disclose the names of the Canadian insurance companies. “Getting into the market can be a bit daunting, though. More clients are coming to us for help.”

Several of the Top 10 insurers in Canada, as measured by direct premium written, declined to comment for this article, including The Co-operators, Economical Insurance Group, Intact Canada, RSA Canada and State Farm.

Allstate Canada chief risk officer Ryan Michel, whose parent company launched its Drive Wise UBI program in the state of Illinois in December 2010, says “we are looking at a telematics program in Canada, but there is no definitive plan to offer it in the near future. Generally, I think it is inevitable that telematics will emerge here. The costs and logistics issues will be addressed and consumers will, in fact, start to demand it.”

At least one Canadian-based insurer is rolling out a version of a telematics program for commercial auto fleets. Zurich Fleet Intelligence is a global fleet management program that uses vehicle telematics to monitor, understand and manage driver behavior, according to Leszek Bialy, vice president and head of customer and distribution management for Zurich Canada.

“Zurich Canada is working to integrate the use of telematics as part of its commercial fleet management solution,” Bialy notes. “Currently, (we are) in discussions with a variety of telematics vendors to bring a complete solution to commercial fleets. This is an ongoing process.”

Commercial fleets may be an easier entry point for telematics in the insurance market, according to Zurich Canada’s national director of transportation for commercial markets Angelique Magi.

“Unlike perhaps with the personal lines market, we have the benefit of the insureds coming to us,” Magi says. “They want us to help them understand the data, give them risk insights, help them manage their fleets. There is so much data in the onboard vehicle systems, but the question is how it is utilized so that fleet operators can get a handle on what it means.”

Harbage concurs that there are a host of perks for telematics on the commercial auto front. “When you peel back the information and look at it, there are all kinds of benefits,” he says. “If you have safer fleets, it obviously means fewer losses and lower insurance costs, but it also tends to result in lower fuel costs. Where we have seen safer fleets, there has also been a 10% reduction in fuel consumption — that is a huge cost factor.”

However, the personal lines market represents the largest piece of the auto insurance pie for mainstream insurance carriers. And here the activity in the United States has yielded refinements and results — and perhaps potential lessons for Canadian insurers keen to try the telematics market.

Obstacles and Incentives

A common obstacle with any UBI program is customer participation — gaining a critical mass of clients for economies of scale. Insurance companies are reluctant to disclose how many drivers are in their telematics programs, but research firm Frost & Sullivan estimates the U.S. market could have 1.1 million UBI activations by 2017.

Harbage notes the typical proportion of drivers in an insurer’s book of business who opt for UBI is roughly 40%. “Insurers have tried a number of methods to encourage customer buy-in,” he says. “One of the key things about UBI is self-selection. It is voluntary and you tend to get better, safer drivers willing to partic ipate in the program.” The most prevalent lure is discounted rates, with the promise that premiums will only go down, not up. Progressive Insurance, which first started to experiment with UBI in 1996, has refined its Snapshot program to offer quick savings and simplicity to the customer, according to Richard Hutchison, general manager of UBI for the Ohio-based insurer.

“Snapshot is easier to understand and more attractive to drivers,” Hutchison says. “We know from our research that this version will be more appealing because drivers can save money after just 30 days instead of six months.”

With the Progressive UBI program, drivers who sign up only need to share six months of driving data before they return the telematics device to the insurer. People who drive less, in safer ways and during safer times of the day are more likely to get a discount. Progressive may require periodic check-ins with customers for an updated picture of driving habits, Hutchison notes.

Progressive is emphasizing savings up to 30% for drivers who voluntarily sign up for Snapshot. With mass media advertising through its spokesperson “Flo,” the company has the widest geographical presence and has attracted roughly 250,000 drivers to its UBI program.  The company also released a survey in December 2011 that estimated more than 39% of drivers in the United States, or 70 million people, could save with UBI programs like Snapshot.  

Allstate gives drivers an immediate 10% discount off their car insurance if they join the Drive Wise UBI program, which is offered in Illinois, Arizona and Ohio. The program tracks factors used to calculate a driver score, including mileage, hard or extreme braking and maximum speed. Driver behaviour and total mileage determine the amount of further discounts (up to 30%) for those participating in Drive Wise.

“The Drive Wise program has had a tremendous reception, more than we anticipated,” says Michel, who did not disclose actual participation numbers. ‘’Part of that is that we educated our agencies and pursued targeted customers who were likely to enroll in the program.”

Other insurers have tried different angles to help draw customers into their UBI services. Liberty Mutual subsidiary Safeco Insurance’s Rewind program turns the incentive from the front-end discount to the back-end claim, providing instant forgiveness for an at-fault accident, ticket or minor violation for the first policy term. In return, customers plug in a telematics device that monitors driving habits for an “evaluation period,” according to Safeco. Drivers who qualify can get their accident or ticket permanently waived from their insurance record.

Safeco also offers a Teen Safe Driver Discount of up to 15% if a telematics device is installed in the vehicle a teenager drives on a regular basis.

State Farm Insurance, the largest writer of personal passenger auto insurance in the United States, is using telematics as part of a broader safety, emergency and roadside assistance program called Drive Safe & Save. State Farm offers several devices, including In-Drive Communicator and In-Drive Connect that collect data on driver behaviour and analyze driving statistics. The company advertises that low mileage and safe drivers can get discounts of up to 50%. Other devices, such as In-Drive Visor Clip, give drivers access to emergency and roadside assistance with the touch of a button. The program is available to drivers in California, Illinois, Ohio and Texas.

In addition to concerns about volume, another hurdle facing telematics offerings has to do with privacy: people are nervous about the use of data, fearing that some kind of Orwellian ‘Big Brother’ might be monitoring their driving behaviour. Privacy groups and some lawyers in the United States have raised questions about how data could potentially be used in certain scenarios, such as accident claims investigations.

Harbage acknowledges there is ongoing sensitivity about data, but the voluntary nature of the UBI programs, coupled with full disclosure from the insurer, usually blunts the concerns.

“Insurers have been very careful with this and we have always recommended complete transparency,” Harbage notes. “They have to spell out specifically what the data will be used for and what it won’t be used for. For example, many insurers state upfront that the data will not be used for claims investigation, unless the client specifically requests this.”

Michel, who was involved in the launch of the Drive Wise program, says Allstate has been extremely transparent about the information it tracks and how it is used. “We do not include a GPS so we don’t monitor where vehicles are driven,” he says. “We only look at distance and other factors that are directly measurable from the car’s own technology. Customers themselves can also see the results. We don’t want any surprises in terms of privacy, data or discounts. Everything is transparent.”

Costs

Arguably, the biggest obstacle facing insurers in the area of telematics is cost. The expense of setting up a UBI program involves more than just the actual price tag of the devices. It also includes the cost of capturing, storing and analyzing the data. Even here, however, insurers have benefited from advances in technology. In most cases, companies do not charge customers for the cost of the device or participation in the UBI program.

“The costs have come down,” notes Harbage. “That is true not just for the cost of the devices but also for the data storage, speed of data transfer and analytics. For example, two years ago, the telematics device cost $200. Now, it is half of that. The data storage and maintenance costs have also gone down. Cost is still an issue, of course, but not as much as it was in the past.”

Part of the cost issue has to do with logistics, notes Michel. “An insurance company has to invest in a device that can be installed easily in the customer’s vehicle, can capture data and send it seamlessly back to the insurance company,” he says. “The technology is there and the costs are coming down. But UBI is also about volume. You have to get the numbers and that can take some time.”

For proponents of UBI programs, the benefits of telematics in underwriting and rating far outweigh the costs associated with offering the service to drivers.

“In the past we have relied on customers talking to agents and saying, ‘Here is how frequently I drive, here is where I live, here is my safety record,’ and we gave them a rate,” says Michel. “These models only partly reflect the individual risk. With telematics, we get a much more detailed view of the data. We get a much more individualized risk profile.”  

If verified mileage is not already in use as a rating factor, usage-based rating offers an immediate upgrade in price accuracy, adds Harbage. “There are also major advances in risk segmentation from using more detailed vehicle data. An excellent example of this is traffic density and road type based on when and where the vehicle is actually driven.”

Harbage says the micro-data of UBI programs go well beyond the “traditional insurance pricing algorithms” of insurance underwriting, which often include more indirect risk factors such as credit scoring and territory rating. “UBI uses actual vehicle operation data to measure risk exposure, achieved in near real time,” he says.

In the commercial auto market, Zurich Canada’s Magi says the initial application of telematics is focused on fleet safety and driving behaviour. However, the data could play a role in underwriting and rating in the future.

“Telematics provides the best ‘over-the-road’ information about fleets; not just how many kilometers they drive, but where they drive, what time of the day and so on,” says Magi. “Right now, our fleet intelligence solution is customer-focused in giving our clients greater insights into risk management. But this information and data can eventually be used for underwriting purposes to offer more accurate pricing acuity on fleet experience.”

Underwriting knowledge and rate accuracy are clear goals for insurers, but telematics also offers a public good, Harbage says. “It is really exciting how UBI can encourage safer driving,” he notes. “There is the ability to give consumers information on key measurements such as speed and braking. We can say,  ‘Here is how you drive now, here is how you can improve and here is where your insurance can be lower.’ I think that is a message this industry would embrace.”

Harbage lists other potential societal and public policy benefits of UBI programs, including changes in driving habits/frequency, lower car emissions, fewer road casualties, improved emergency response times to accidents and even reduced insurance fraud. In a fraud case, for example, insurers could use telematics to demonstrate that alleged injury claims incurred at extremely slow speeds.

With the pace of UBI programs steadily gaining ground in the United States, the next year or two may prove to be an interesting period as Canadian insurers test out the market for telematics. “I think UBI would make sense especially in the Ontario auto insurance market,” Michel says. “The premiums here are quite high. If drivers could see that certain factors and behaviours will reduce their rates, I think they would be quite interested.”

Harbage observes a tendency for market leaders to force the issue, pushing other large brand names into UBI. “And then you have the smaller to medium sized companies finding their own way into the programs,” he says. That seems to be happening in the U.S. market, as insurers search to put their particular spin on UBI.

One potential dilemma for insurers that have no plans to offer UBI in the future may be whether they will face adverse selection. In both their reports, Celent and Moody’s suggest late adopters will likely have to deal with the threat of more high-risk drivers as safer drivers gravitate to the discounts of UBI programs.

“Adverse selection should be a concern for insurers,” argues Harbage. “If there are enough big names attracting a significant amount of customers to these UBI programs, what risks are the other insurers left with? The key question for those insurers with no UBI program is: how long can they go without doing this?”