How do you feel about paying higher auto insurance rates because a small segment of the population takes unnecessary risks when driving? Since insurance companies pool risk, you often pay for others’ bad driving habits even if you are a good driver yourself. In the current personal auto insurance system, good drivers are subsidizing the bad driving behavior of others. Unfortunately, that is how the system works. With the exception of good driver discount programs, there has never been a direct way to control your insurance costs — you pay the same whether you drive 5,000 or 25,000 miles a year.
Over the past few years, however, insurance companies have started to offer more programs that change how you pay for insurance, making it more equitable based on your driving habits, and are leveraging wireless technology to do so.
Usage based insurance (UBI) programs vary in their design, but most involve having the consumers self-install a small, compact device into their vehicles On-Board Diagnostic (OBD II) port, which is available in all passenger vehicles in the United States since 1996. Once installed, the device “talks” to the vehicle to record information such as miles driven, rates of acceleration and deceleration, and other variables defined by auto insurers.
Pilot programs have been around for many years, but not until recently have they been successful for personal vehicles due to the high cost of technology and the requirement for professional installation of an UBI device. However, recent advances in embedded cellular technology have enabled device manufacturers to design and build devices, which are not only low-cost, but also easy to install.
Currently, five of the top 10 personal auto insurers in the United States have implemented usage-based insurance plans, with Progressive Insurance leading the rollout with 39 active states for its Snapshots program. Even smaller insurance companies are beginning to adopt machine-to-machine (M2M) technology to take advantage of the available driving data to evaluate policyholders and accurately charge against driving behavior. Industry experts expect that within the next four to five years, 20% of car insurance policies in the U.S., of which there are currently about 200 million, will incorporate some form of a usage-based model.
Value-Added Service Bundling and Differentiation
Whereas UBI programs alone were once a differentiating feature for an auto insurer, they are well on their way to becoming a standard offering. This is now forcing insurance companies to differentiate their programs through additional technology-enabled services that provide added benefits for policyholders beyond the traditional cost-savings based on good driver behavior.
The connectivity provided by telematics devices allow insurers to offer “concierge”-type services, including driving directions, improved claims services, traffic alerts, emergency assistance, towing services, and other travel-related services. Some insurers have used telematics solutions to implement teen-driving programs, providing parents notification if the vehicle their son or daughter is driving is exceeding certain speeds.
Capturing Driver Data
When it comes to tracking policyholders, wireless connectivity is a crucial element of usage-based insurance, but the question still remains: what type of device should an insurer use to collect and transmit driving data? Why invest in dedicated telematics devices when so many motorists have smart phones capable of collecting much of the essential information?
As Nielsen recently reported, smart phone penetration has reached 40 percent in the U.S., and many of these phones are equipped with accelerometers and GPS capabilities. Smart phones can capture driving information and perform a similar function to that of a dedicated telematics device, and insurance companies could feasibly develop an application or program to leverage this information and determine policy pricing. This solution, however, is far from problem-free, as drivers would have the added responsibility of activating the accelerometer and GPS functions on their phones to manage this data collection, which is an added hassle as well as a drain on their phone batteries. An insurers’ access to this and other phone data is an additional concern, as is driver safety when it comes to handling the devices while driving.
Options that are more viable are shared services devices such as infotainment systems that offer cellular connectivity for a variety of potential services and user functionalities. Though these telematics capabilities will eventually become standard, the ubiquity of cellular connections in cars is years away from becoming a reality. Automotive manufacturers are currently developing their model year 2015 or 2016 vehicles that are equipped with infotainment and telematics systems. For many years to come, there will continue to be late-model vehicles on the road that will require a dedicated telematics device to participate in a UBI program.
While UBI adoption continues to grow among personal auto insurance companies, commercial insurance remains a largely untapped market with more than two-thirds of providers inactive in terms of UBI programs. This may seem surprising, as telematics solutions have been widely deployed for fleet management across the country with data collection happening, so the technological infrastructure is already in place.
The challenge for commercial insurance providers, however, is accessing this data, due to the lack of standardization in fleet management devices and management platforms. Finding a way to efficiently access and unify this driving data on the part of insurers represents a significant opportunity for both providers and commercial policyholders in terms of cost savings.
There is a concern that the popularity of UBI programs could lead to the erosion of certain privacy rights due to the information that auto insurance companies could collect regarding driving behavior. Although data privacy is a critical concern and must be managed carefully, the risks are similar to those found in any electronic exchange of data, including credit card and ATM transactions, e-mail and e-commerce, that have become a part of everyday life. Contrary to popular belief, the vast majority of UBI deployments do not include GPS location data is part of the device. Most insurers have pledged not to financially penalize policyholders based on the data collected in the event of an accident, a concern for drivers considering using an UBI device.
All of these issues are important considerations when designing an UBI program, but with the current momentum of the market, it seems that the rapid uptake of this consumer-driven M2M implementation is well on its way.