Waterloo, ON (Feb. 5, 2013) – It’s official – the usage-based insurance market is heating up, and in a big way. In fact, according to industry insiders a full sixty percent of current U.S. auto insurance is covered by insurers who offer a UBI program. So what’s holding back the other forty percent? MyConnectedCar recently sat down with Blair Currie, VP Marketing at IMS to discuss some of the benefits and most prevalent challenges facing usage-based insurance programs.
MyConnectedCar (MCC): Welcome, Blair. We’re seeing a lot of UBI events and news covered by the auto and tech media these days. While some insurance providers are embracing it full throttle, others are holding back. Care to delve into what might be the sticking point for a lot of companies?
Blair Currie (BC): For those holding back, there’s a general impression that it’s a negative disruptive force in the industry that’s going to only cost money. We beg to differ. Telematics is game-changer in how auto insurers handle pricing, customer loyalty and new revenue-driving services to clients. I think we’re slowly getting through to those who think that telematics is a negative force in the insurance business. They are starting to realize it can provide advantages to those who embrace it.
MCC: What are the biggest questions insurance providers worry about?
BC: I see five challenges to overcome. The first is to construct a viable business model. Second is to deal with consumer adoption. The third is to secure and maintain senior management commitment. The forth is what to do with the data. And fifth is how to differentiate your program from the other players.
MCC: Differentiate how?
BC: Well, for starters, some of the initial telematics programs are based on the thinking that drivers are creatures of habit, so once you capture 2-3 months of driving behavior then you “know” the driver. While this thinking makes for a good business model (because you can cycle a single device to a number of drivers) it does not take into account that knowledge of a “placebo” device can improve driver behavior.
IMS thinks that driving behavior can be modified by sharing the data of his/her driving behavior, ranking the driver against his/her peer group (oddly enough up to 91% of young drivers think they are ‘above average’) to show how they can improve through on-going coaching and tips. Accordingly, we produce weekly reports for insurance companies to share with their policy-holders. Potentially, these reports could indicate when a policy-holder might be in a position to discuss a lower rate with his/her auto insurance provider. Or maybe it avoids the price discussion altogether because the policy-holder feels that he/she is getting better value from the scores and tips.
MCC: So IMS is a proponent of ongoing monitoring versus a limited window to monitor driving behavior?
BC: Yes, really getting to know your drivers can only take place over time. If a device is removed from the vehicle, a number of policy-holders will revert to bad habits over time. So we think it’s important to have longer term continuity of use.
The argument then reaches a point when having a device installed becomes a “new normal” and behavior has stabilized. We think that could potentially happen, but at the same time, there will be increasing uses for in-vehicle connectivity. If so, the auto insurance company can also “rent” this space to other service providers like infotainment companies and others who are eager to get into connected vehicles.
MCC: Is there really a market for long-term users of telematics devices? What about when they are used for Young Drivers programs? That implies the devices are used for limited amounts of time, until a teen is properly trained and obtains a license.
BC: You’ve really hit on a hot topic. Most people think that driver education is only for the purpose of getting a driving license and that this is only required when people first learn to drive a vehicle, and in some cases, when a driver’s capabilities deteriorate – sometimes through age.
Safety is a lifelong journey, and our telematics devices save lives, limbs, property and money through continued education. For example, we tie our telematics devices to posted speed limits and have real time audio responses in vehicles to indicate when a driver is speeding. This is both for safety purposes and to help a policy holder avoid speeding infractions. Furthermore, our tips can help save money by showing how a policyholder can get more fuel economy from a vehicle by avoiding harsh acceleration and excessive idling.
MCC: What about the argument that demographics are the best indicators of driving behavior? After all, they’ve been used for decades and the entire insurance industry has relied on them for pricing their products.
BC: While data on age, sex, income, type of vehicle tell part of a picture, they don’t capture the attitudes and behavior of drivers. Just as there can be “old” young people and “young” old people there can be great young drivers and poor older drivers.
The best predictor of risk is a blend of demographic and psychographic data. The insurance providers often talk about the risks of young drivers, but we believe this thinking needs evidence to support or refute the original hypothesis. In that sense, actual behavior can be more telling than theoretical behavior.
MCC: Ok, what about the privacy issue of having “big brother” tracking consumers? Doesn’t the data collected by telematics devices belong to the insurance company?
BC: A number of insurance companies that pay for telematics programs think they “own” the policy holder data. While they certainly can have rights to the data, we don’t necessary agree they “own” the data and that keeping it to themselves is the best business practice. IMS believes that the driver inherently owns the data. Rather than keep the data for risk assessment and price determination alone, we believe that a better strategy is to share the data in a usable form with the policy holders. This will increase the “service level” of the insurance proposition and help increase consumer loyalty.
Finally we believe that the funding for this data sharing program can come from the reduction in advertising currently needed to retain customers. In the US, insurance companies spent $5.7 billion on advertising to reduce churn. We think that a portion of these funds would be much better spent on a customer relationship management (CRM) program backed by telematics.
For example, if the industry took 1% of advertising spent, that could fund a $57 million program. If it were 5%, that is over a quarter of a billion dollars. So there is a natural place to fund a UBI program without upsetting the industry’s main business model.
MCC: What about the notion that telematics programs are all about price?
BC: In the U.S., Progressive is controlling the UBI dialogue around price, which gives them a definite advantage because they are a “price player. Most of the auto insurance companies that are getting into the UBI business are also following Progressive. The result is that auto insurance is becoming a “race to the bottom” which will only benefit the “price players” like Progressive and Geiko.
Telematics is about building a relationship with one’s policy holder and changing the paradigm that the insurance company is a financial institution and its policy holders are suppliers of capital. Telematics can enrich this relationship by providing a valuable service to users through CRM.
At the end of the day, we believe telematics and UBI programs will represent true behavior modification because consumers will start to rely on their auto insurance companies for service and advice.
MCC: Thanks for the insights, Blair.
For more information on UBI, IMS is offering a deeper dive in two forms:
- IMS UBI Webcast – which is applicable to all global insurers and available for viewing by clicking here.
- IMS UBI Boot Camp – a boot camp designed specifically for Canadian insurers. You can sign up by registering here.
Intelligent Mechatronic Systems Inc., based in Waterloo, Canada, is a global leader in Telematics and Infotainment, including the convergence of both technologies in delivering the ultimate Connected Car experience. For more information, please visit www.intellimec.com.
Source: Intelligent Mechatronic Systems Inc.