We’ve followed Telematics/Usage-Based Insurance (UBI) for some time now. There has been significant progress, and there is an assumption that it will have a 25% market share over time. Of late, however, some folks are suggesting that UBI could plateau early just as other forces start to shape the next generation of automobile insurance.
Usage-Based Insurance Really Should Work!
The way automobile insurance is rated and priced pleases almost no one – except journalists (who find every quote fodder for another column on how bad things are). So, anything that makes the process simpler, more transparent and tied to common principles should help.
On the surface, telematics-enabled UBI fits that bill. With a UBI infrastructure, we could rely on algorithms to manage rates and premiums, and focus on important things like improving service and claims handling.
It started out so simple …
We even had a champion. Progressive Insurance, after a false start, introduced a simple, consumer-friendly program – Snapshot – supported by massive marketing dollars. It seamed to be fool proof.
By 2010, we were writing about Snapshot hitting its stride. We all were just waiting for others to come on board. Experts were suggesting we would hit a critical mass by 2017 and would round out at 25% market share in the middle years of the 2020s.
And insurers and consumers are prepared
A 2015 report from the US National Association of Insurance Commissioners (NAIC) – Usage-Based Insurance and Vehicle Telematics: Insurance Market and Regulatory Implications – finds that US insurers are taking to the UBI approach: “more than half of the major insurers in the U.S. have an active telematics UBI program, and several others are conducting market trials for their own UBI offerings.”
And, on the surface, consumers are open to the concept. Citing a Deloitte study, the NAIC staff report that 25% of consumers would allow monitoring of driving behaviour without any minimum discount and a further 25% would allow monitoring if the discount were high enough.
But data management is on the critical path …
The NAIC report notes that data management is a critical success factor. And these tools are well within reach. However, it seems that insurers are not taking advantage of them:
the insurance industry, for the most part, has not yet moved to richer and more granular data that includes not only driving behavior, but also environment (i.e., road type and conditions, traffic patterns, etc.) and still depends on exposure-related driving variables such as mileage, duration of driving, and number of braking or speeding events, which are just secondary contributors to risk.
And the regulators want a say ….
Sandra Castagna, Associate Commissioner from the Maryland Insurance Administration (Retired), contributed the Regulatory Implications section for the NAIC report. Castagna notes that the initial telematics construct was simple enough: mileage information collected by a device in the car would be transmitted to the insurer where “a premium discount is applied to the policy by the insurer.”
However, with advanced devices and data analytics, Castagna writes: “telematics-based UBI programs are no longer as simple and straightforward as they used to be”.
And this presents challenges to regulators in reviewing rate filings. Castagna notes:
The challenges presented here are neither inconsequential, nor insurmountable; however, they do warrant attention. Vast amounts of information are collected, stored, analyzed and incorporated into rating plans by or on behalf of insurers. Currently, regulators must determine if the rating plans comply with rating laws, if premiums charged are in accordance with those filed plans and if appropriate disclosure
Not trivial stuff. It will take time.
Meanwhile, back on the street ….
Other forces are having an impact on automobile insurance. Younger, urban consumers are moving away from personally owned automobiles. Self driving vehicles have moved from science fiction to practical fact.
The impact on insurance is not certain, but few regard it as benign. Even Warren Buffett acknowledges it.
There’s a forum for your thoughts…
Are we getting close to a Telematics Plateau? I’d be interested in your thoughts in print here or in person.
At the 2015 Insurance-Canada.ca Executive Forum next week, we will have a panel of experts looking at automotive technology. The Forum Theme is “Emerging Threats and Opportunities.” Apropos?
Thank you for this article. It clearly outlines the issue with UBI. Putting it simply, UBI simply is not UBI. Insurers are having a lot of trouble communicating exactly what is collected and how it is used. Absent of this fact, consumers are hesitant to embrace the concept. We have two cars in our family that travel less than 50 miles a month but we are unable to find a company willing to share the details around the offered telematic device.
Summer time tends to be a quiet period in many industries and while telematics is still a young “industry” it tends to have quieter periods in the summer.
That said, as an industry and as a company, we’re starting to see movement again in telematics as fall approaches. With this change in season the first group of about 10 insurers, who entered telematics over the past couple of years, are moving to “Phase 2”. A second group of almost 10 other insurers are about start telematics programs.
While one can look at growth in telematics as reaching a “plateau” I think that it’s important to also understand why this so-called plateau appears to have occurred, and to project whether there are/will be any changes to move to the “next level” of growth.
Plateaus often occur when there are barriers to growth. In the case of telematics the key barriers to growth remain regulations and the business model. To start only three provinces currently allow telematics for personal lines insurance – Quebec, Ontario and Saskatchewan. Others have talked about permitting personal lines telematics but it is not yet allowed (unless I’ve missed something over the last few weeks when I was on leave). So this is one major reason for the plateau – the inability to roll programs out nationally.
Second, in Ontario, where auto insurance accounts for almost 30% of the total P&C premium in Canada, there is precious little funds available funds for innovation because of the mandated rate reduction. Couple this mandate with an inability to reduce to change the product, and there is little or no money for funding telematics.
Third the business model is seen by many to be a constraint. If you permit me to speak about IMS and our clients for a moment, we are jointly making headway with the revenue drivers of telematics (attracting new and more profitable drivers, retaining the best drivers, increasing the average sales per customer through related services, reducing claims costs etc.), In fact we are being asked to share our learning through workshops with more insurers.
The current problem is that the device costs are actually rising at a time one would expect them to decline (i.e., via Moore’s Law when volumes continue to expand). The main reason for this is the components that comprise the OBDII devices and smartphones (accelerometer, GPRS, processors, memory etc..), are priced in US dollars. And we all know that the Canadian currency continues to slide against the US Greenback.
So what is going to drive new growth and overcome this plateau? First, cheaper OBDII solutions such as the Bluetooth solution we (and likely others) are now rolling out. Second, we have a complete mobile solution which does not require an OBDII device. You will soon see a number of insurers in Canada and the US use this. And we are starting to use telematics to better manage claims and reduce their costs. This is still someone restricted but smart insurers are finding ways to provide assistance to their policyholders and thus reduce the response time and overall claim cost in the United States, and we expect soon in Canada.
While the telematics industry can only do so much to help shape regulation we have a consulting practice to help insurers figure out the business model for telematics. This model factors in the current constraints and shows how value can be derived.
Thanks for the insightful comments, Blair. I think this reinforces one of the core messages: the wide variance of plans and options combined with challenges of regulation (in personal lines especially) creates a large roadblock for insurers and suppliers. These could be overcome, but the time frame may be longer than users’ attention span.