Savings Grace

Some in the insurance industry take the view that carriers who offer usage-based insurance (UBI) to auto policyholders need to be able to raise premiums when telematics systems detect risky driving behaviour. However, not everyone – including some provincial regulators – is convinced that telematics-based premiums will achieve the goal of making roads safer and, in turn, help reduce the number of collision-related claims.

Road safety is but one of many issues still up for debate when it comes to UBI: privacy, data ownership, access to data and telematics as a fraud-fighting tool are among the others. Despite the outstanding questions, insurers continue to move forward – some inching ahead; others advancing full throttle – with UBI.

How will UBI ultimately play out for a mix of policyholders that undoubtedly displays both good and bad behaviour?

DISCOUNT, SURCHARGE OR BOTH?

In April, Intact Financial Corporation and The Co-operators Group Ltd. began offering UBI to auto policyholders in Ontario, joining Desjardins General Insurance Group Inc. in using telematics technology to offer discounts for good driving behaviour. The South Central Ontario arm of the Canadian Automobile Association (CAA) was also expected to launch its own UBI offering in the province May 2.

In essence, the carriers are collecting and analyzing data – such as time of vehicle use, total distance driven, incidents of sudden acceleration, hard braking and speed – from devices connected to vehicle computers. The data is sometimes used to assess risk, which in turn, can be used to determine rates.

Industrial Alliance Home and Auto Insurance Inc. has been offering UBI in Quebec under the Mobiliz brand since 2012. The program allows policyholders to realize premium reductions of as much as 25% after the first month – or increases of as much as 100% – depending on driving behaviour. For example, the insurer will add a surcharge if a policyholder’s telematics data indicates that his or her vehicle was driven at 18 kilometres per hour over the posted speed limit.

In Ontario, though, auto insurers offering UBI products are focusing (at least for the present) on discounts. “Everyone else seems to think this is a good thing,” Angelique Magi, vice president of strategic initiatives and transportation for The Guarantee Company of North America, suggests of discount-only systems.

Although The Guarantee currently does not have a telematics offering for its private passenger auto customers, it is testing the waters through a small trial involving a number of executives and directors who have telematics devices installed in their own vehicles.

“For us to be in the marketplace, we have to have a discount structure, but then it loses the entire value of why you are trying to incent good behaviour,” Magi notes.

“It could mean that anybody who has OnStar could qualify for a telematics discount. What benefit to the consumer, what benefit to the other drivers on the road, what benefit to society does that bring?” she asks.

George Cooke echoes Magi’s concerns. “Studies show that when you get prices moving in both directions, combined with education, you can actually reduce the total loss cost,” says Cooke, president of Martello Associates Consulting, who previously served as chief executive officer of The Dominion of Canada General Insurance Company for almost two decades.

“You have to have surcharges, and you have to have discounts, so you reward and punish,” he argues.

Cooke is also an advisor to Otman Basir, CEO of Intelligent Mechatronic Systems Inc. (IMS), an Ontario-based vehicle technology vendor whose products include telematics devices.

The Co-operators is one carrier using IMS technology. Having launched its en-route Auto telematics services April 2, The Co-operators provides its customers a 5% discount on enrolment and recalculates the discount after 125 days and 1,000 km. Depending on driving behaviour, a policyholder could save as much as 25%, the carrier reports.

With incentives like these, the company expects both frequency and severity of claims will improve over time, says Leonard Sharman, senior advisor of media relations at The Co-operators. “In Ontario, the worst-case scenario is your rate remains the same,” Sharman says of the discount-only model. “That is a pretty good deal for the consumer, so we are happy to play by those rules for now,” he says.

“We can’t do as much in Ontario as they do in Quebec, just by virtue of the way that (the Financial Services Commission of Ontario, or FSCO) has set up, just by using a pure discount structure,” Magi says. “We are not able to use telematics to its fullest, in my mind,” she suggests.

Although Magi could not say whether or not The Guarantee will also start offering UBI to its Ontario policyholders, the insurer is “definitely looking at a telematics proposal in Canada,” and “would like to have a position of when we would launch later in 2014.”

As for CAA South Central Ontario, it planned to launch its CAA Connect program in early May, collecting data on distance travelled, speed and when a vehicle is operated. Customers will receive a 5% discount “just for signing up” and can earn “up to” a 15% discount on renewal after one year, a company spokesperson reports.

CUTTING RISK CUTS COSTS?

“Studies in the industry, in the United States and Europe, have shown loss ratio improvements of over 20 points for those who have a telematics device in their vehicle,” the spokesperson points out.

Magi also expects that telematics could reduce claims costs. “If you know that if you have a bit of a heavy foot,” she says, that could mean paying a bit more.

“Most times when people are faced with something that is a deterrent on price, they will change behaviour,” Magi suggests. “Once you educate them as to what is dangerous on the road… showing them how to make simple choices to drive more consistently, you, as an insurer, can absolutely reduce claims numbers and reduce the severity of the claims,” she argues.

Mark Prefontaine, Alberta’s superintendent of insurance, suggests there is a “level of evidence” from other jurisdictions, including the U.S., that insurers can deter risky behaviour by using telematics to determine price.

“I really don’t have a firm position to say we are completely 100% convinced that this, in fact, would create safer roads,” Prefontaine says. “I certainly think there is an opportunity. The real-time feedback that drivers can receive through some of the delivery mechanisms that have been presented to us should definitely help inform drivers on the quality of their driving,” he adds.

In Ontario, FSCO officials, too, need to look at statistics before determining if use of telematics actually improves driving behaviour, says Bruce Green, senior manager of the rates and classifications unit at FSCO’s auto insurance division. “In the absence of Ontario claims data, we will look to the claims data in other jurisdictions, and certainly there is a lot of material out there that would suggest that usage-based insurance can very much improve driving behaviours and reduce congestion on the roads,” Green says.

Some of the things that telematics tracks – hard braking, sudden acceleration and speeding – can lead to accidents, he suggests. “Not engaging in those bad practices will improve road safety and help bring down claims costs for companies,” he contends.

Using surcharges to deter bad behaviour is not actually prohibited in Ontario, Green points out, but “to this day, I don’t think any insurers have come to us and filed a surcharge-driven model,” he reports.

“We work with companies before they come to FSCO on what a filing might look like and really only discussed with those insurers discount-based models. We went on to write a guideline that suggested that until these things are in operation in the Ontario market, there is not going to be a lot of actuarial (data) to support (the claim that) usa ge-based insurance encourages the kind of safe driving that is going to result in some claims cost savings,” Green says.

For FSCO, “it’s a lot easier to approve a modest discount that is unsupported because, in essence, it is bringing premiums down.”

An Ontario auto carrier wanting to use telematics data to apply surcharges “should have the actuarial support to show that certain patterns of bad driving behaviour will result in more accidents and, therefore, higher claims costs,” Green explains. “In the absence of a support for a surcharge, an insurer might have some challenges in getting the regulator to approve it.”

Cooke predicts, however, that it is only a matter of time before Ontario does allow surcharges. “If you want to truly improve driving behaviour, you have to penalize bad behaviour,” he argues.

“With the surcharge, all of a sudden this device has economic incentives that can go both ways. You can change behaviour. That lowers the total cost. The politicians will catch on to it sooner or later, and when they do, they will force it,” Cooke adds.

Alberta’s Automobile Insurance Rate Board supports UBI as a “voluntary discount program,” but the board’s 2013 annual report makes it clear that carriers will require approval from the Superintendent of Insurance before rolling out any such products.

“It is my intention to have a decision made within this calendar year,” on whether or not to approve auto rates in Alberta based on UBI, Prefontaine says. “It’s part of a broader review that we have under way into rating factors and how underwriters are using information to develop their rating programs for auto insurance,” he adds.

One issue that must be considered is privacy. “We are looking carefully at what Ontario has used to create comfort around informed consent,” Prefontaine reports. “We are keenly aware that this is something that information and privacy commissioners across Canada are interested in, because of the growing discussion around telematics.”

Privacy was among a number of issues raised during a panel discussion at the CIP Symposium, produced by the Insurance Institute of Canada, this past April in Toronto.

“When you first sign up a policyholder to have a telematics device, you are going to have to be clear with the consent part,” Bill Premdas, vice president of insurance for Travelers Canada, told attendees. Policyholders need to know for what they are providing consent, for which purposes that consent will be used “and you have to stick to it,” Premdas added.

BROKER IN THE MIX

Clearly, there are issues for both policyholders and insurers. But what are the issues for brokers?

Colin Simpson, CEO of Independent Broker Resources Inc. (IBRI), a subsidiary of the Insurance Brokers Association of Ontario (IBAO), spoke on the same panel as Premdas.

Simpson told attendees that he can envision a time when a consumer buys a telematics product, starts using it and is soon back in a broker’s office. “You can bet your bottom dollar that there will be a time when that consumer goes back to the broker and says, ‘This thing says I have been speeding. I did not do what it says I was doing. Where’s my discount?'” Simpson warned.

In just such a scenario, he argued it will be “critical” for brokers to have access to telematics data to be properly informed of the risks on which they are advising customers. “We need to make sure that as we go forward that the broker has access to that driver information. It is something that the insurance companies are thinking about and are trying to deal with, but it is something that was not in the forefront of their minds when they were developing telematics solutions,” he suggested.

IBAO plans to release a broker-owned telematics solution in Ontario this summer. When IBAO announced its product last year, it reported that policyholders would be able to transport their data from one insurer to another.

IBRI will provide infrastructure to support the carriers’ telematics offerings and each company “is at liberty to develop their own specific product value proposition,” comments IBAO CEO Randy Carroll.

One way that carriers can differentiate themselves, Cooke suggests, is by using different rating criteria than their competitors. There are “many different facets in what is being measured, how it is being measured, the quality of the data, the way in which it is analyzed, et cetera. And to think that you are going to get multiple carriers looking at these in the same way any time soon, I think, is unrealistic,” he says.

“So if you are a broker, I would at least urge you to look at that particular way of thinking and either accept it and do something with it, or alternatively dismiss it, and I would suggest you are doing so at your peril.”

Simpson agrees that with any product, carriers need to reduce the cost of distribution. “I don’t think anybody can take cost out of the system unless we work together,” he suggested at the symposium. “If we keep lumping more and more different solutions into an office that’s supposed to be supplying distribution to the insurance company, then it is very difficult for them to take the cost out and to become more effective at what they do,” he added.

Simpson noted that as with multiple portals, if there are 12 different insurance companies with 12 different telematics boxes using 12 different ratings parameters, “it becomes very burdensome for the distribution model that we all have today.”

To work well for the consumer, Magi suggests, telematics “has to be a bit more detailed” than basing rates on factors such as distance, time of use, hard braking, sudden acceleration and speeding.

“It gets kind of vanilla when you do that,” she comments. “There are so many other factors that can be measured in a more effective manner.”

BEYOND SETTING PREMIUMS

For example, Magi points out that an insurer could use electronics to monitor weather and the drivers themselves – such as whether or not the driver has been convicted of impaired driving and, as a result, cannot start the vehicle without using a breath alcohol ignition interlock device.

“The combination of multiple devices, to be able to paint an overall picture of driver behaviour, which is utilizing biometrics, that is probably the future state in personal lines,” Magi comments. “The problem that I see is… once you start introducing different devices that monitor different things, the cost goes up.”

Telematics could also be used to conclude if the driver is distracted or drowsy, suggests Otman Basir of Intelligent Mechatronic Systems.

“Drowsiness is going to manifest itself in a certain pattern of mobility and we do have the algorithms to process that information and to conclude whether the vehicle is being driven by, let us say, a drowsy driver,” Basir explains.

That offers a glimpse of the potential, but as it stands, current applications of UBI in Ontario are not this sophisticated. “One of the big things with telematics as it is right now is the device does not know who is driving, which complicates things a bit,” suggests The Co-operators’ Leonard Sharman.

“Things like distracted driving or drowsiness or that sort of thing is not detectable as things stand now, but I can certainly see a time in the pretty near future when the technology is good enough that it can pick up things like swerving or getting a little out of your lane and that sort of thing,” Sharman adds.

And while carriers use telematics to price in keeping with risk, Cooke suggests that is just one benefit. Telematics can also be used to investigate claims and to reduce fraud.

“When you have the devices in the vehicle, with telematics, you can determine exactly who did what to whom and when,” Cooke says. “So it would be very obvious if there was an attempt to avoid an accident as opposed to an attempt to cause one, in the context of a staged collision. The theory says they should disappear,” he says.

With staged collisions tending to be perpetrated by organized crime, Cooke predicts “the minute these guys realize that you are permitted to use these tools, it provides a huge deterrent and they most likely don’t try them in the first place.”

Yet another way that telematics can help reduce claims losses, Magi suggests, is by having courts admit evidence from a vehicle manufacturer’s on-board device, as is the case in the U.S. “If you are able to utilize data within an accident to be able to determine up front whether the customer is at fault or not, that, in my mind, could be advantageous from a claims mitigation standpoint,” she argues. “It could allow for companies to make some smart decisions on whether to go through with litigation.”

Carroll further suggests telematics offers promise as a value-added service.Robin Joshua, director of corporate underwriting and risk management for CAA Insurance Company, would likely agree. One such value-added service could be remote diagnostics, Joshua noted during a panel discussion at the Property & Casualty Insurance Technology Conference in Toronto this past March.

CAA responds to 250,000 requests to unlock cars every year, he noted at the time. “If you could do that remotely, that’s a service that takes five minutes as opposed to 45 minutes to get to the customer,” he told attendees.

“We are trying to understand, how can we connect with traffic reports and provide you a better route to get you where you are going? Those types of things are additional features that you can build in to your telematics offering,” Joshua added.

“The opportunity in the whole food chain for either segments to disappear altogether or the relationships to change is part of what makes this so disruptive and transformational,” Cooke suggests of telematics.

“There will be huge winners and huge losers, and it is going to come way more rapidly than anybody thinks.”