Today, at least 25 auto insurers use UBI programs, most of which collect driver data through dongles plugged into a car’s onboard computer.
With 40 percent fewer personal auto insurers today than in 1996, the auto insurance industry has experienced a rapid contraction. At the same time, premium growth has been relatively flat, increasing at an average of 1.3 percent per year. The result is the fierce competition for premium dollars we now see on television with geckos, ducks, Flo, and Mayhem.
But increased premium volume doesn’t always result in a profitable or sustainable business. Insurers are constantly striving to optimize rate-to-risk, the concept of making sure customer premiums are commensurate to the risk of loss. In the case of auto insurers, that’s the risk that drivers will damage their car or cause injury to themselves or others.
Insurers have worked for years to find the best way to calibrate that risk. But traditional rating factors, including age, gender, marital status, driving violations, credit score, and previous claims experience, are only proxies for risk. For a true measure of driver risk, you need to assess the risk level of drivers’ daily commutes and their actions on the road. Insurers recognize the value of directly measuring driving behavior, and they’ve launched programs that use aftermarket telematics devices, or “dongles,” that transmit data wirelessly through cell phone networks.
Advances in technology have made the collection of telematics data less expensive and more reliable, allowing auto insurers to create usage-based insurance (UBI) programs. Today, at least 25 auto insurers use UBI programs, most of which collect driver data through dongles plugged into a car’s onboard computer.
Typically, an insurer tracks a driver for a limited period of time and offers a discount to those policyholders whose driving behaviors suggest that they’re lower-risk than traditional proxies would indicate. (Insurers monitor for short time periods and recycle the devices to amortize their fixed cost over more policyholders.) Smartphones are also starting to collect driving data and help reduce fixed costs even further, but they don’t yet provide reliable data. Both technologies have helped advance insurance rating beyond the simple use of proxies, but neither is an ideal solution.
However, the industry offers a third alternative with the potential to change how auto insurers assess driver risk and sell insurance.
The rise of the connected car
The ultimate objective for usage-based insurance is the same for both the automobile and telecommunications industries: the vehicle as a fully connected data center. Connected cars remove the limitations of expense and logistics in current data-collection technologies that insurance companies employ. Connected cars create opportunities for new levels of innovation.
According to IHS Automotive, the number of cars worldwide connected to the Internet will grow more than sixfold from 23 million now to 152 million in 2020. It’s only a matter of time before every car on the road is connected, with a constant data flow from car to manufacturer.
Creating a telematics data exchange
A major American auto manufacturer has already committed to providing driving information from consenting customers from its connected cars to insurance companies through a data exchange. Such consumers consent to provide data both to an exchange and to individual insurers. The exchange concept has the potential to transform auto insurance for both insurers and consumers.
Continuous feeds of driving data from connected cars present insurers with the opportunity to greatly enhance current UBI programs and create new and sustainable ones based on how often and well people drive.
A telematics data exchange has the potential to shake up the industry for auto insurers, consumers, and automakers:
Benefits to auto insurers
- Ease of use — To start and maintain a UBI program today, insurers need to spend significant dollars on the technology used to collect the data. Data from a connected car doesn’t require logistical support; insurers just need to connect to the exchange.
- Ongoing evaluations — Rather than asking drivers to install a data-collection dongle or use a smartphone app that’s intrusive and subject to error, the connected car enables usage-based insurance programs that support discounts based on continuous evaluations of driving safety.
- New insurance programs and accurate pricing — Millennials and city dwellers are driving less. Yet those consumers typically pay as much or even more than policyholders who drive more miles a year. That happens despite what history tells us: the more miles driven, the higher the loss potential for insurers. Connected cars provide the best measure of tracking miles driven, creating an opportunity for insurers to offer “pay as you go” insurance programs that charge premiums based on the number of miles actually driven. Using miles driven and other telematics data means that insurers can more accurately price policies.
- Telematics at point of sale and renewal — A data exchange can store information from connected cars. When a car owner shops for a new insurance policy or renews an existing one, telematics data will be available to insurers to produce faster, more informed quotes. Rather than monitoring drivers after they become policyholders, insurers will have access to driving behaviors when pricing a policy. That knowledge can take much of the guesswork out of underwriting and rating decisions.
- Workflow flexibility — Insurers can use an exchange telematics model and filed rates to be “up and running” on day one. Other insurers that have their own models and filed rates can simply connect to an exchange to access connected-car driving data.
- Customer engagement — With telematics data, insurers can engage consenting consumers more often and even become part of the driver safety equation. If insurers can provide customized safety tips to specific policyholders for example, it’s a win-win for both groups.
- Improved customer acquisition and retention — The availability of high-quality and timely telematics data enables insurers to issue policies more quickly and quote premiums more accurately, improving the overall customer experience and enhancing their competitive position.
Benefits to consenting consumers
- Safer driving — Using auto telematics, drivers can access their driving history and be made aware of any troubling patterns involving starts, stops, acceleration, sharp turns, or heavy braking. Software can make suggestions on how to drive more safely.
- Reduced insurance and car ownership costs — According to Edmunds.com, insurance costs make up from 6 to 12 percent of total vehicle ownership costs over an eight-year period. Insurers will award lower premiums to drivers who make the effort to drive safely. And lower premiums can reduce the total cost of car ownership.
- More options — With “pay as you go” insurance, low-mileage drivers will no longer have to subsidize high-mileage drivers.
- Portability — Drivers with safe driving records can take their driving data with them and shop around to find the best deal for car insurance.
- Improved risk rating — Drivers in the “nonstandard” market for unsafe driving can get back to the standard market and lower premiums faster by consistently displaying safer driving habits.
All UBI programs are voluntary. If car owners don’t want their driving history available to insurers, they can simply opt out. Drivers have control of where, when, and with whom they share their data. They’ll also have the opportunity to get feedback on their driving behaviors before sharing their information.
The role of automakers
Automakers play a key role in a telematics data exchange. The telematics data from connected cars is highly valuable to insurers for policy pricing, claims management, and underwriting — and an exchange would facilitate the transmission of such data. An exchange can also help manage all the details of the automaker-insurer relationship, freeing up the auto manufacturers to focus on their core competency — developing innovative and technologically advanced vehicles.
Insurers are clamoring for driving data that flows from connected cars back to them in formats they can apply directly to their business. Car manufacturers want to meet consumer needs. And consumers want to stay more informed about how they drive so they can realize financial benefits from insurers for safer driving behaviors. Manufacturers also need to satisfy insurer requirements without getting involved in managing the data and the technical and operational infrastructure required. The industry is ready for a data exchange that can provide a single efficient access point, offer usage-based models and analytical tools, and provide quality data upon which to base decisions. Creating a valuable network for insurers, manufacturers, and policyholders is the logical next step.
Jim Levendusky, vice president, Telematics, Verisk Insurance Solutions, leads product development and strategic marketing for auto and commercial telematics and usage-based insurance products. He held various roles at Verisk, where he managed marketing and development for a variety of personal and commercial lines products. Before joining Verisk, Jim held positions in auto insurance underwriting, operations analysis, insurance product management, and specialty products marketing.
Verisk is hosting a new marketplace called the Verisk Telematics Data ExchangeTM. Learn more about the exchange.