Pricing it right: telematics is transforming how auto coverage is written and priced, and integrating the technology into mobile phones is the next game-changer.
Among the tech innovations is the growing use of telematics and usage-based insurance. These technologies, says Donald Light, director of Celent's Americas property/casualty insurance practice, may significantly transform the way auto coverage is written in the United States and across the globe "because for the first time it gives insurers insight into how drivers actually drive."
Prior to that, he said, carriers relied on secondary factors such as age, gender, driving record and miles driven to rate and price auto insurance. "However, none of those factors really directly reflected how one person drives compared to another person. Telematics and UBI are profoundly different models for pricing and rating. While historically used factors won't totally disappear, there will be a seismic shift in how auto insurance is priced, regulated and perceived by consumers."
Telematics, which records vehicles' movements using global positioning satellites, and usage-based insurance, in which a logging device plugged into a car tracks certain variables regarding individuals' driving habits, continue to gain momentum in the U.S. insurance market. Progressive Insurance's Snapshot, for example, allows users to install a device into their car's onboard computer that records various metrics like time of day and hard braking. Since its inception 15 years ago, more than 1.4 million users have enrolled in the program, noted Dave Pratt, the company's UBI business leader.
While telematics and UBI may modify how auto insurance is priced, it begs another question: Will they also drive down the number of auto accidents and bring about a decline in carriers' premiums?
Basil Enan, CEO of the insurance comparison shopping platform CoverHound, isn't so sure. "Decreasing frequency and severity of accidents due to telematics and UBI remains a question mark as to whether the programs make you a better driver. You don't change your stripes; you are who you are and carriers base price on that."
However, one thing that's likely to change is the way in which driving data is captured.
Mobile devices like smartphones will soon become the "game changer" in telematics technology, said Andrew Goldberg, director of Deloitte's financial services technology practice. "The simplicity of being able to download an app to a phone, which already has the hardware needed to make telematics possible, along with a less expensive cost point and decreased fulfillment time, will make mobile an ideal platform for telematics and UBI."
The Power of Mobile
Simply put, Goldberg said, "once you download the mobile app, you're done. Consumers don't have to get, install and send the device back to their carrier."
And, added Robin Harbage, who heads sales and client delivery for Towers Watson's global usage-based insurance practice, mobile phones are already equipped with necessary applications like global positioning systems and accelerometers.
"However, there are some problems with filtering out the motion of the phone versus the motion of the vehicle. And only slightly more than 50% of people now have a smartphone," he said. "But mobile offers a great opportunity. Carriers just need to become comfortable that they're collecting enough of the trips and figure out what to do if someone doesn't turn on a phone or have it with them while in the car."
Those fears, however, aren't anything new for carriers. "This isn't about capturing data in a trip but rather looking at trends over time," Goldberg noted. "Once apps are downloaded, we can audit what goes on, just like with plug-in devices. If you don't capture enough miles driven, an insurer won't provide a discount. Anytime there's new, emerging technologies, often somebody is against it because it changes the game. So carriers have to become attuned to mobile as the next trend, and a number of them are already jumping on this as we speak."
The use of telematics and UBI is alive and well in the United States, Harbage said. In fact, most of the top carriers are very active with one or more UBI products, "some writing substantial volumes to make this a core product."
The results of those efforts, however, aren't as clear cut.
"Most carriers don't separate out results for UBI products; they are closed-lip about it from a competitive standpoint," he said. "But results we've seen from different UBI operations indicate carriers are all seeing remarkably low frequency of loss and great retention in the products. So from a metric standpoint this is turning out to be a bonanza for early adopters."
No longer is telematics a question of "should we get in?" but rather "when and how?" Goldberg said. "Boardroom conversations aren't asking if this is a good thing to do; rather CEOs are now getting pushed hard as to when they will have capabilities in the market to do this."
Goldberg believes larger carriers will have the upper hand. "They've been in this longer and have worked out many of the logistics issues. Now the biggest barriers are prohibitive costs of plug-in devices and managing the fulfillment, and often the reverse fulfillment of getting devices back from customers."
However, the good news is that UBI-related device costs are beginning to trend downward, with the average unit cost approaching $100--a several-hundred-dollar drop from just a few years ago, Harbage noted.
Now what carriers must contend with, he said, are consumer reservations around the technology. "In a recent survey, we found 79% of U.S. consumers said they might be open to a UBI product. However, those not moving into this expressed everything from privacy concerns to fears that rates will go up. But there is no program in the U.S. today that charges more than their standard rates based on driving behavior."
Progressive CEO and President Glenn Renwick recently told investors in a conference call that a combined 70% of people say "maybe" or "no way" to the company's Snapshot UBI product. "You get about 30% of people saying 'Yeah. Why not?' You get another 30% of people saying 'Maybe. I need to know more.' You get about 40% of people saying 'No way in hell'."
Learning About UBI
That's why education is paramount, Harbage said. "The marketplace is really going in two different directions regarding telematics and UBI. There's a message out there that good drivers don't have to subsidize other drivers and can receive a discount for good driving behavior. Most people think they are better than the average driver, and typically they're right. These programs reward them for that."
The other side of the coin, he said, is companies like State Farm saying "we can do more with this. By plugging in a device, we can develop information services and share them with customers, such as the health of their vehicle and whether their car battery is weak."
The technology even has the potential to save lives, Harbage added. "Allianz's use of telematics in Europe has saved at least four lives, including someone trapped in an avalanche who was able to get immediate assistance because their vehicle location could be tracked."
By 2018, ABI Research predicts, global use of telematics will likely exceed 100 million. Many carriers are already doing their part to make that happen.
Earlier this year, Progressive rolled out its "Rate Suckers" ad campaign to educate consumers about Snapshot and UBI. "As of June, our premium on Snapshot was $1.8 billion over a trailing 12-month basis. We have over a million customers and are very pleased with the growth of the program," Pratt said.
Progressive, which filed its first patent application for Snapshot in 1996, settled on its current design in 2008, he said. "That design is appealing to customers because it's easy to do, is free and gives them a chance to earn discounts based on good driving. Also, it's a low-cost model because we get the device back and reuse it."
Allstate also is making big strides on the UBI front with its Drivewise program, which uses advanced telematics technology and plugs into an onboard diagnostic port found under the dashboard or steering column in most cars (1996 model year and later) to track driving behavior.
Currently, about one-third of all new customers enroll in Drivewise, where it is available. And since its inception, more than one billion miles have been recorded to help identify the safer driving habits that lead to savings on car insurance for participating customers.
Data and privacy concerns that consumers often struggle with "need not be a concern with our program," noted Sarah Inciong, operations director for Drivewise. "We don't collect any personal or identifiable data through the device, nor do we use GPS tracking. Rather, data from the device provides insight on the customer's driving behaviors when they use their vehicle."
What should carriers now be doing to gear up for a new era in auto insurance?
They need to decide whether to take an offensive or defensive strategy when it comes to telematics and UBI, Goldberg said.
"The goal is to get comfortable with that. If they go into this, it's important to jump in with the next generation of technologies. Don't focus on the me-togs. Ultimately, carriers will want to pivot away from what their competition is doing, and mobile is one way to do that."
He also suggests carriers "become clear about how they'll gear up to leverage and use more than just telematics as a way to price. It's really a value chain with customers. Mobile provides a unique ability to interact with information but also shows information back to a driver immediately and connects with them. That's why mobile has a leg up because it really provides a continuum of connecting with customers, staying with them and lowering cost points."
Now, Light says, the strategic question for carriers is how aggressive do they want to be "in grabbing people who are good drivers today and people who can be better drivers tomorrow with telematics-based feedback and incentives."
Also, he added, carriers have to figure out how to translate raw telematics data into sound, regulatory accepted rates.
"Part of the challenge is that this kind of data has never been available before. So how do you create rates based on it? Also, the amount of data is huge. It's difficult to find actual examples of big data in insurance, but telematics data is big data. Carriers' IT groups need to find ways to store that data and deploy the right analytical tools to model it."
Enan compares telematics and UBI to what the industry saw with credit scoring decades ago.
"However, I believe this is a much fairer system. But it's something departments of insurance will struggle with like they did with credit in California and the fears that some people would be adversely affected. But I think they'll have a harder time saying insurers can't use telematics."
In many ways, Goldberg said, telematics and UBI have already changed the auto insurance landscape. "That's because people now have a way to shift from how we'll price based on a correlation to individual accountability for their own driving to receive discounts accordingly. Advances like driverless cars are more macro trends afoot today around people potentially driving less and pricing on distance.
"The bottom line is that over the next 10 years, technologies will emerge that get back to making sure you price insurance relative to an individual and less on a group basis. Telematics is getting to those individual characteristics and behaviors."
* Setting the Scene: Telematics and usage-based insurance are changing how auto writers price coverage.
* Current Happenings: Mobile devices may soon be the newest way to capture driving behavior.
* What to Do: Carriers need to decide how aggressive they want to be around the technologies.
Allstate Insurance Group
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|Date:||Oct 1, 2013|
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