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Pay As You Drive Growth Driven by Profitability, Competition, Regulation

It seems that Pay-As-You-Drive (PAYD), or Usage Based Auto Insurance (UBI) is gaining traction and credibility.  Drivers for the growth include business and regulatory reasons.  In addition, a respected consulting firm has offered a professional service to supports its use through aggregated data and analysis.

We have written in previous posts that Progressive Insurance has taken a lead in implementing its version of PAYD .  Towers Watson has studied the penetration of PAYD in the US.  Towers Watson director Robin Harbage was recently quoted in Insurance & Technology  as saying that Progressive has more than 250,000 insureds enrolled in its ‘Snapshot’ Pay-As-You-Drive program.  Towers Watson research has also found that insurers representing 60% of the US personal auto insurance market share have implemented a version of a UBI program to insureds in at least one state. Further, insurers representing an additional 20% of the private personal auto premium are running or preparing to run internal UBI pilots.

Harbage says that insurers are finding increase underwriting accuracy is a major driver for this growth:  “Where verified mileage is not already in use as a rating factor, usage-based rating offers an immediate upgrade in price accuracy.” Harbage continues: “There are also major advances in risk segmentation from using more detailed vehicle data. An excellent example of this is traffic density and road type based on when and where the vehicle is actually driven.”

Beyond the US, there is increased use of Telematics driven, at least in part, by regulation.  Catherine Stagg-Macey, reports on the Celent Blog: “The European Commission has already mandated new cars manufactured in Europe have to have a black box device. This is part of a pan-European initiative called e-Call which links up emergency services across the region. So if you are holidaying in France, in a new car, and have an accident, your telematics device makes a call into the local emergency services. The idea being that quick responses to accidents will save lives.”

Further, as we noted back in March, the European Court of Justice has passed a ruling to restrict the use of age and gender in automobile underwriting.  According to Stagg-Macey, the convergence of the availability of the devices and the restrictions from the court “make telematics more viable if not the only way forward for motor insurers.”

We commented back in May, that implementation of PAYD may be a multi-year initiative, simply due to the time it will take underwriters and actuaries to adjust to using the new criteria.  Towers Watson is addressing the implementation issues to some extent with the introduction of a service, called DriveAbility℠, which includes the aggregation and analysis of data from multiple insurers.  The objective is to provide “analytical support for insurers that translates to an individual score for each vehicle to both inform auto policy rating and encourage safer driving habits.”  Towers Watson indicates that uptake for its services are growing;  it is currently advising 18 insurers on their UBI programs.