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Technology is spurring innovation and altering risk scenarios throughout the economy including in auto insurance. While advanced auto safety features, the shared economy and driverless cars promise to reshape auto insurance down the road, usage-based insurance (UBI) powered by telematics is already having an impact.

UBI is on the road to becoming a standard product, with more insurers offering it and more consumers willing to let insurers monitor their driving habits with a telematics device in exchange for potential savings on their insurance.

These telematics devices can measure miles driven; time of day; where the vehicle is driven (GPS); rapid acceleration; hard breaking; hard cornering; air bag deployment and other behaviors of interest to underwriters. UBI allows premiums to more closely reflect actual driving behavior than traditional pricing methods.

Boston-based insurance consultant Strategy Meets Action (SMA) claims that 70 percent of North American property/casualty insurers are operating or planning UBI programs and 75 percent believe UBI will “fundamentally alter the auto insurance industry between now and 2020.”

SMA study co-author Richard Welch of REW Consulting says the industry has been experimenting with UBI for 15 years and is now nearing a tipping point. “Even if consumer adoption is in the low end of the consensus range, usage-based insurance will grow rapidly, and as it grows, the traditional market will shrink, making it very difficult for companies not playing in the usage-based segment to maintain market share,” he says.

According to the National Association of Insurance Commissioner (NAIC), experts expect that 20 percent of all motor vehicle insurance in the U.S. will incorporate UBI in some form within five years.

Most of the top 10 auto insurers have UBI programs, with giant GEICO being one of the holdouts.

UBI programs have typically relied upon proprietary devices installed in each vehicle, an investment only large carriers could afford. But now firms like San Francisco’s Driveway Software are making UBI cheaper for any-size carrier with smartphone applications, and cloud based analytics and portals.

Public awareness and acceptance of UBI are gradually rising.

A recent LexisNexis Risk Solutions survey of more than 2,000 consumers found that awareness of UBI has more than tripled in the last three years to 36 percent from just 10 percent in 2010. Among aware consumers, Progressive Corp. far outranks competitors in recognition—with 78 percent saying they are aware of its UBI program, compared to 8 percent for Allstate and 6 percent for State Farm.

But the survey also suggests auto insurers still have a long way to go in getting the word out, given that only three percent of those consumers who are aware say they actually use UBI.

Drivers aged 21-34, those who buy minimal coverage and those who drive every day are the most likely to be receptive to UBI, surveys show.

Savings Sensitive

Not surprisingly, consumers’ interest in UBI goes up when they are promised their premiums could go down. While half of the consumers surveyed by LexisNexis said they would be likely to sign up for a 10 percent discount, the figure jumps to 62 percent for a 15 percent discount and shrinks to 23 percent for a 5 percent discount.

According to Allstate, a third of all new customers enroll in its UBI program, Drivewise, in the more than 20 states where it is available. The company says that seven of every 10 Drivewise customers save money and no one receives an increase. Of the drivers earning a discount, the average saving is 14 percent per vehicle.

“Drivers’ views on UBI are rapidly evolving — they are embracing the technology and making it part of their driving experience,” says Robin Harbage, global lead for Towers Watson’s UBI practice and its DriveAbility product for insurers.

Despite all the momentum, Progressive, which pioneered in UBI with its Snapshot product, has acknowledged that getting customers to adopt UBI has been harder than it first thought it would be.

“You get about 30 percent of people saying, ‘Yeah, why not?’; you get another 30 percent of people saying, ‘Maybe, I need to know more’; and you get about 40 percent of people saying, ‘No way in hell,'” Progressive CEO Glenn Renwick said this summer.

Progressive says more than 1.6 million drivers have used its Snapshot product since 2008. The insurer has increased the percentage of its direct channel customers who have tried Snapshot to about 35 percent from 20 percent two years ago.

Privacy Matters

Research suggests that some consumers shy away from UBI out of concern for their privacy. Consumers in the Towers Watson survey cited several concerns related to privacy including insurers sharing consumer data (41%), fears that insurers will monitor and track driving destinations (42%), and apprehensions about insurers using data to invalidate claims (38%).

A recent study by University of Denver professors could stoke those privacy fears. They maintain that the UBI tracking programs installed in millions of vehicles can collect data that shows where drivers are going, unbeknownst to most users of the technology.

Many telematics devices on the market do not incorporate GPS information that reveals a person’s fixed position on the planet. But it turns out insurers don’t need GPS to pinpoint a driver’s destination; they can use a simple algorithm along with the data they do collect to learn where the driver is going. According to Rinku Dewri, an assistant professor in the Department of Computer Science, the study shows there is less privacy when using a UBI than insurers are claiming.

The study’s authors have called for new policies to inform customers of possible risks. “Mostly we are asking for more transparency from the ones who are offering these programs,” Dewri said, adding that UBI users are given a sense when they sign up for the programs that the data can’t be used to track them.

The LexisNexis survey found that in addition to discounts, factors that increase consumer interest in UBI are the ability to opt out without penalty (80%) and the ability to choose information provided (77%).

A Consumer Federation of America (CFA) report suggested that privacy concerns are less of an issue if UBI is voluntary. Privacy concerns “will be eased if insurers do not pressure policyholders to participate in related programs but rather offer participation as an option,” the CFA said.

Not all agree that the privacy concern over GPS-like tracking cited by the Denver professors is real.

According to Progressive, the company has collected more than 8 billion miles of driving data. This information is not shared with other companies, nor does Progressive track where its drivers are headed, said spokesman Jeff Sibel.

“We’re not concerned about where a person’s going,” Sibel said.

Sible said Progressive’s voluntary program doesn’t have GPS functionality, and the data the carrier does retrieve is not shared.

Timothy B. Nee, president of Dorman Consulting Associates, a consultant to the property/casualty industry, said most carriers sift through for the information they need to make good underwriting decisions – and oftentimes the information beyond that never even makes it to the carrier.

Also, carriers don’t want to gather or keep information on where each customer has driven to avoid getting drawn into unrelated legal entanglements. “Can you imagine how many divorce attorneys would subpoena information on a suspected wayward spouse?” he said.

Diane Koken, a former insurance commissioner for Pennsylvania who is now a consultant, told the Insurance Regulatory Symposium at St. Joseph’s University earlier this year that one of the benefits is that UBI minimizes carrier reliance on proxies for driver risk such as marital status, age, credit scores and gender.

“It allows customers to understand and actually eliminate their risk behaviors, and hopefully to even reduce accident frequency,” she said.

Sixty percent of those in the Towers Watson survey interested in UBI programs said they would be willing to change their driving behavior. When asked how they might change, they listed sticking to the speed limit (71%), keeping a safer distance from other vehicles (52%) and driving more considerately (49%) as the leading adjustments.

Still, there’s a downside to this innovation, Koken said.

“Regulators like that costs are going down, but they’re not going to go down for everybody. There will be winners and there will be losers, and that will create a lot of public policy concerns,” she said.

Beyond UBI

The Towers Watson survey also sought to gauge consumers’ interest in additional services that can be enabled by the technology underlying UBI devices. Drivers indicated an interest in a number of these services, and 72 percent said they would be willing to pay for them. Drivers showed most interest in vehicle theft tracking (83%), automated emergency response (82%) and vehicle wellness reports (79%).

“Consumers’ interest in UBI-related value-added services presents a great opportunity for insurance companies,” said Harbage. “Insurers can begin thinking about de-commoditizing their products by incorporating these services into their UBI offering. They can really cater their products to the very specific needs of the market, and if done effectively, it will lead to growth and higher retention levels.”

To better serve their clients, Nee said agents should pay close attention to which carriers offer UBI, what they offer and how it may benefit their clients.

“First, agents should remind their customers that not all insurance carriers offer the same coverage, especially in terms of quality customer service or claims handling,” Nee said. “It is not all about price. Beyond that, when deciding among carriers with similar coverage, claims handling, and price, it is worth trying a carrier’s program. This is especially true if the prospective carrier will let the customer test drive the program while staying with their current carrier.”

Topics Carriers Auto