Technology To the Rescue.

Global positioning satellites and digital video cameras are helping auto insurers underwrite more accurately and reduce costs for policyholders.

Gus Kupriva loves owning four vehicles. What he doesn't like is paying insurance on them when they aren't being used.

The 52-year-old Houstonian and his wife, Sharon, own a 1981 Dodge pickup truck, a Ford Grown Victoria, a station wagon and a Mercedes Benz, which he calls his "toy." "Sometimes, my truck sits around for a month before I drive it," Kupriva said. So when he received a direct-mail flyer from Progressive Corp. three years ago asking for volunteers to take part in its pay-as-you-go auto insurance program called Autograph, Kupriva jumped at the chance. He was intrigued by the idea of being billed by use. "I pay for my utilities by usage-why not my insurance?" he said.

Insurers like Progressive and Hartford Insurance Group are conducting pilot programs that may lead to more accurate underwriting and, in turn, may allow insurers to offer discounts to their policyholders. New products like Autograph and General Motors OnStar and devices such as the DriveCam digital camera may change the way insurers bill and underwrite auto insurance and allow policyholders to control their auto insurance rates.

"Anytime we can segment use is an advantage in underwriting. This allows us to offer better products to consumers," said Maria Henderson, Progressive's general manager for Autograph. Some state legislators are nudging insurers to offer drivers the option of a mileage-based auto insurance policy. In January, Texas Rep. Ruth Jones McClendon sponsored a bill calling for insurance companies to offer drivers, especially senior citizens, a pay-as-you-go policy option.

Drive Time

The idea for Progressive's Autograph product was discovered as the insurer was creating the most ubiquitous symbol of the company--the immediate-response vehicle. In 1990, then-Chief Executive Officer Peter Lewis fired off a memo challenging Progressive's claims department to find a way to respond immediately, in person, whenever a policyholder was involved in an auto accident. The IRVs made their debut in 1994. But it was during a discussion to improve the IRVs in 1996, Henderson said, that the kernel of thought emerged for Autograph. "At one of the meetings, we discussed using global positioning satellites [GPS] as a way to deploy the IRVs," Henderson said. "Someone then mentioned if we could understand GPS' real usage, it would be a powerful rating vehicle. So out of a claims initiative came a product initiative," she said.

Currently, Progressive is the only one of the top five private-passenger auto insurers pursuing GPS-based policies. Even No. 1 State Farm Group reported that it was not working on anything in that area.

Autograph gives policyholders control of their insurance rates. Users-are billed only for the amount of time they drive, the time of day they are driving and where they drive to, although Progressive still considers traditional factors, such as the driver's age, vehicle make and model, gender and place of residence when it determines the per-minute rate. With Autograph constantly monitoring each minute of a drive, policyholders can control their insurance costs by adjusting how long and where they drive. For instance, daytime driving is less expensive than nighttime driving, and the premium increases when a policyholder chooses to motor on a busy interstate highway instead of a quiet, 35-mph back road. "Autograph users learn to adjust their commute so their auto insurance can be cheaper. How you use your car is a predictor of loss for us," Henderson said.

Global Positioning System 

The technology behind the vehicle tracking is the global positioning system, a satellite navigational system that was developed and maintained by the U.S. government to provide navigation capabilities for military ground, sea and air forces, according to the National Aeronautics and Space Administration. GPS was the technology used to rescue U.S. Air Force Pilot Scott O'Grady in 1995 when his F-16 fighter was shot down in Serbian-held territory. O'Grady's life vest contained a portable radio receiver that was tuned to the GPS network, which allowed a team of U.S. Marines to locate the pilot behind enemy lines.

GPS uses a necklace of 24 satellites that revolve around the Earth transmitting data. Autograph's data, such as tracking Kupriva as he drives his station wagon to work, is based on a triangulation of the satellites' navigational signals. As Kupriva pulls out of his driveway in the outskirts of Houston, Autograph tracks his 30-minute commute to where he works as an engineer.

Kupriva is saving $400 annually on the coverage of his four cars, or about 20% of what he was previously paying. "The best part is paying on just the usage--it's fair," he said. Kupriva had the videocassette-sized Autograph unit installed by an outside vendor that was selected by Progressive. Kupriva's auto-use data is collected from the Autograph unit using cellular communication technology. Autograph users are required to sign a consent form giving the company access to the data. Users are billed $1 for the first car and $15 for each additional vehicle installed with Autograph.

Henderson said the usage policy also is attractive to senior citizens, people who lease vehicles and watch their mileage use, members of carpools and teen-age motorists, whose driving privileges are restricted. And Autograph has attracted a following of single mothers who are interested in the safety features the system provides. For an additional monthly fee of $15, the program adds theft recovery, remote door unlocking, roadside assistance, directional assistance and low-battery detection. And the expanded service features a "panic button," which the consumer can use to instantly contact a staffed, 24-hour response center.

Focus groups led Progressive to choose Houston as its pilot site, because most of the city's residents commute to an area to the north that's full of office parks. As Kupriva describes it, Houston is a city where you have to drive everywhere. As of June 1999, the pilot program was offered throughout Texas, which is Progressive's third-largest market. The Autograph pilot program is now closed to new subscribers. In 1999, Progressive wrote 8.8% of its business, or $558 million in direct premiums, in the Lone Star state. Overall, Texas is the No. 2 market--behind California--for private-passenger auto insurance sales, with $8.3 billion, or 7% of the U.S. total, in direct premiums written in 1999, according to A.M. Best Co. data.

Progressive is studying the data from its hundreds of Autograph policyholders to determine whether it makes economic sense to offer Autograph to a wider group of consumers, Henderson said.

Autograph's ability to track where and when a policyholder drives may bring to mind the Big Brother state of George Orwell's novel 1984. Henderson said the insurer was so concerned about that aspect when rolling out the pilot program that it followed up when a prospect didn't sign up after receiving a quote on the product. "We wanted to understand why they didn't sign up and discovered that privacy was not an issue for the majority of people," she said.

Kupriva said he wasn't concerned about the Big Brother resemblance either. "I've got nothing to hide," he said.

OnStar

General Motors' OnStar division uses comic-book super hero Batman to advertise its OnStar technology. GM hopes that consumers who see Batman using the OnStar system in his Batmobile to fight crime will want the futuristic technology in their cars, too. Although OnStar is marketed as a safety and security system, its use of GPS tracking also can allow policyholders to pay for coverage by usage. For insurers, using OnStar's onboard system would allow them to surpass a major hurdle--the expense of getting the equipment into the automobile. OnStar technology is already installed in 34 of GM's 54 vehicle models.

Progressive and OnStar are working together to determine whether the OnStar system can be used for Progressive's usage-based auto insurance program, according to Progressive.

OnStar's system consists of a receiver and an embedded cellular phone that is installed in the vehicle at the factory. Using GPS technology and wireless communication, drivers can contact advisers who can provide real-time roadside assistance. Other services offered to the driver include automatic notification if an air bag deploys, stolen-vehicle tracking, emergency services, remote door unlock, remote diagnostics, convenience services and concierge services. New online services are being added.

OnStar, which installed its first systems in 1997-model Cadillacs, provides service in all 50 states. As of year-end 2000, it served more than 800,000 subscribers out of 1 million GM cars and trucks. The system was factory installed as standard or optional equipment. OnStar estimates its system will be available on almost 4 million vehicles by year-end 2003.

How's My Driving?

Employees' driving habits are always a concern for businesses with commercial vehicles, such as Tran-Star Executive Limousine, located in North Babylon, N.Y Steve Paul, president and CEO of Tran-Star, has had his drivers followed to monitor their behavior. "We're always looking for a way to control our drivers--every commercial vehicle owner hopes to accomplish this," Paul said.

Last fall, Paul's insurance broker asked him if he would like to participate in a pilot program that monitors his drivers. Hartford, the 12th-largest commercial auto writer in the United States, teamed up with a company called DriveCam to install digital cameras in Paul's fleet of 65 limousines. The goal of the program was to gather data on how DriveCam helps to reduce losses. Paul saw results within two weeks. "We saw a whole different driver attitude. It was like having a supervisor in the car," Paul said.

The DriveCam product, which is about the size of a disposable camera, is installed behind the limo's rear-view mirror and is triggered by any unusual vehicle motion or a collision. A red light on the camera indicates that DriveCam has been activated and the unit has saved an unusual driving event in its digital memory. The unit can be connected to a TV, camcorder or personal computer for viewing. The DriveCam revealed some of Paul's drivers "treating our limos like people treat rental cars: driving the limo in a way you'd never drive your car, like cutting a corner too fast," Paul said.

"When there is an event, the driver gets unbiased feedback--plus the date and the time appear on the video," said Ed Andrew, president of DriveCam. DriveCam costs $795 per vehicle and requires no maintenance.

Commercial auto insurers, such as Hartford, also like the idea of supervised driving, since collectively they were faced with a combined ratio of 118.8 in 2000 that mushroomed from 1995's combined ratio of 108.1. Commercial insurers are battling increasing severity trends because of multivehicle, multiclaimant accidents; increasing medical costs; increased litigation and generous jury awards, according to the January 2001 issue of Review/Preview, published by A.M. Best.

DriveCam's recording of the action of a vehicle can be used as evidence in accident disputes to drive down loss costs for insurers. Recently, Paul was able to use evidence generated by DriveCam to prove that his limo driver hadn't caused an accident. "The adjuster from the other insurance company came to look at our limo after the accident and wanted to go to the scene of the accident to iron out any details from conflicting reports. I asked him how would he like to see it on tape. After seeing the tape, he opened up his briefcase and cut me a check," Paul said.

Although the pilot program with Hartford is not offering a discount to policyholders yet, several other commercial auto insurers--such as National Interstate Insurance Co.--are giving them to insureds with DriveCam installed on a case-by-case basis, Andrew said.

Constructive Destruction

Crushed car frames and the grotesquely twisted bodies of crash dummies are yielding valuable loss and safety data to auto insurers. Each year, the Vehicle Research Center, which is part of the Insurance Institute for Highway Safety, crashes 30 new vehicles to evaluate how well a vehicle protects its passengers during an accident. In turn, the research yields important information for insurers on their largest expense--claims costs. "The center's benefits to insurers include seeing an improvement in occupant protections that reduces human suffering, limits injuries and reduces insurance costs," said Dr. Adrian Lund, chief operating officer of the Vehicle Research Center.

With auto insurance loss ratios climbing in the last three years, insurers are looking for ways to reduce the incidence and severity of auto crashes. The adjusted loss ratio, the percentage of each premium dollar an insurer spends on claims, has been rising the last three years from 62.6 in 1997 for the top 20 U.S. companies to 66.3 in 1999. About $45 of every $100 in premium earned goes toward paying for auto repair, according to the Insurance Information Institute. At the same time, auto insurers are being squeezed by auto parts manufacturers that are raising prices 3% to 10% on a broad sample of parts.

Beginning with fuel tanks and more recently air bags, insurers have been involved for nearly 30 years in testing and researching new automobile safety features that may save the industry money. Auto testing began in the late 1960s, when two federal laws authorized the U.S. government to set auto safety standards and provided for a national highway safety program. In 1969, the Insurance Institute for Highway Safety hired Dr. William Haddon, who focused the organization on auto safety research and answered auto insurers' call for scientific proof of highway safety measures. In 1992, with funding from U.S. auto insurers, the institute built the Vehicle Research Center near Charlottesville, Va., which contains the 21,600-square-foot crash hall, the scene of the institute's infamous automobile crash tests. The center currently is sponsored by 76 insurance companies.

Today, the institute, based in Arlington, Va., is involved in a variety of safety testing, which includes crashworthiness evaluations, low-speed testing, air-bag testing, head-restraint research and braking tests and demonstrations. But the most visible test is the frontal offset crash test, done at 40 mph. The institute focuses on this crash, because it's one of the most frequent causes of serious vehicle occupant injury in the United States. The test assesses and compares how well passenger vehicles protect occupants in crashes. Insurers, like Nationwide Insurance, the fifth-largest private-passenger auto insurer in the United States, use the loss data generated by the crashes in their underwriting procedures, said Tim Hoyt, vice president of safety for Nationwide.

Passing the Test

The institute chooses the cars it tests to represent a range of manufacturers and the largest portion of new car sales. U.S. automakers sat up and took notice when the institute began publicizing the results of the auto crashes. "The automakers are now supportive and are on site when their vehicles are crashed," Hoyt said. "They make an aggressive effort to redesign the vehicle if it rates poorly."

In fact, the Vehicle Research Center's Lund recalls the Mitsubishi Galant as an example of a vehicle that performed poorly in 1995 testing. As a result of the poor crash results, the car was redesigned and subsequently received a higher rating.

Auto insurers are focused on auto safety, and they lobby for safe-driving legislation. Insurers like Nationwide have safety divisions that work with state lawmakers to lobby for legislation, such as graduated driving licenses, and they interact with national organizations like Mothers Against Drunk Driving, Hoyt said. Nationwide and other insurers actively lobbied automakers to install air bags and to design safer dashboards. "Sometimes it's adversarial and sometimes cooperative," he said of the insurers' efforts. State Farm, in cooperation with the institute, did a 1998 study of the effectiveness of head restraints. This study was recently referenced in a National Highway Traffic Administration rulemaking document. Nationwide is working with automakers to make onboard navigational systems and cell phone use safer. "We're doing research to deal with the problems. Devices don't have to be a problem," Hoyt said. Nationwide is concerned that the navigational systems and cell phones are distracting drivers, whic h may increase the incidence of auto crashes. Nationwide would like to see voice-activated, hands-free systems installed by automakers.

Lund, the institute and automakers are working on guidelines for the installation of side-impact head-protection air bags. Some of these air bags look like long, white sausages and inflate along a vehicle's upper roof rail. Other types come down from the rail like a curtain over the window; still others deploy from the seat back for the front seat occupants. Federal standards exist only for front air bags. The side-impact air bags were introduced in Europe several years ago. U.S. standards were waylaid as the federal government dealt with retooling its frontal air-bag regulations when injuries and deaths occurred with their use. Currently, European and U.S. automakers are offering side-impact air bags with head protection without government regulation. Several U.S. automakers offer the air bags as options in 2001 models. Automakers and insurers believe the side-impact head-protection air bags are important, because statistics show that about half of injuries in side-impact car crashes are associated with the head and neck. Lund predicts that these air bags will be standard equipment in all U.S. cars within the next few years.