Presentation on theme: "Prospects for mileage-based insurance"— Presentation transcript:
1Prospects for mileage-based insurance SSTI webinar seriesMarch 27, 2013March 27, 2013Presented by SSTI
2Practical Solutions to Move America Forward. State Smart Transportation InitiativePractical Solutions to Move America Forward.A network of reform-oriented state DOTs, founded in 2010 and housed at the University of Wisconsin.Executive-level Community of PracticeTechnical assistanceResource for the transportation communityMarch 27, 2013SSTI webinar
3Today’s panelistsAllen Greenberg FHWA Congestion Management and Pricing Team Kelleen Arquette Towers WatsonMarchSSTI webinar
6Usage-based auto insurance What it isA device collects real-time driving dataDate and time, trip duration, speed, turning forces, and even location (optional)Additional data can be merged including weather, traffic, and moreData is sent to the insurance company who uses it to rate the driver on actual driving behaviorsWhat it offers insurersEnhanced risk segmentation & improved pricing accuracyReduced loss costs & reduction in claimsIncreased consumer retention & satisfactionProduct differentiation & brand awareness6
7Usage-based insurance (UBI) Customer FeedbackInsurance Premium$1,200$1,080$1,000$ 900Insurance Premium$1,200$1,080$1,000$ 900Insurance Premium$1,200$1,080$1,000$ 900The Big Picture view of UBI.Insurers encourage program participation typically by offering an introductory discount. Information from enrolled insureds is sent to the telematics provider, which then sends a device to each participant. Most devices go into a car’s ODBII port, which is easy to find and often beneath the steering wheel. When driving, the device collects and sends driving information to the telematics provider, which sends a copy to TW. Info collected includes speed, mileage, events, etc. Based on the data, insurers can find good drivers and apply appropriate discounts. This info can then be relayed to the enrolled insureds by a website portal, which encourages safer driving.The Customer Feedback picture is from the GreenRoad dashboard, and is a great example of a website portal.The website portal informs enrolled insureds about their behavior and how it affects their discount. Drivers with small discounts can modify behavior to drive more safely and get bigger discounts.Q: Is the website portal hosted by the telematics provider or the insurer?A: Usually it’s a link on your website.Company FeedbackVehicle ScoreVIN: 12345…Miles driven: 6,234Event 1 per mile: .05Event 2 per mile: .017
8But what is the potential? Behavioral ModificationPrograms (teens, mature market, etc.)InfotainmentSafety FeaturesEmergency response, Roadside assistance, stolen vehicle recoveryConcierge Services Door unlock, navigation, location assistanceVehicle Maintenance ReportingGreen Driving and Fuel Management
9Customer Installation Experience UBI is enabled by what is called telematics technology – it’s technology that allows for:the device plugged into your car and records driving behavior data then transmitting that data across cellular networks.The device:Plugs into your car and captures data from your vehicle (speed)has a GPS so it knows location of vehicle (optional)accelerometer (to capture cornering, G force)cellular antenna (transmit data)You plug the device into your car’s ODB II portThis is a standard port that is available in all cars manufactured in the US since 1996Typically the port is under the driver side dashThen you driveThe car transmits data through cellular networksData is collected by the insurance company9
10Telematics data is predictive Various studies demonstrate predictive potentialCompanies gain competitive advantage through better segmentationElimination of cross-subsidization is more “fair”These are public reports on driving risk, and demonstrate how telematics can be used to accurately observe these risk factors.Claim Frequency by Annual MileageFrom: Pay-As-You-Drive Auto Insurance in Massachusetts, a 2010 report by an MIT Professor and commissioned by Insurance and Environmental groupsClaim frequency increases as annual mileage increases, just as we expect. Many companies are rating on mileage but most likely the majority of your book is driving in the lowest mileage band which we know cannot true. UBI gives us the means to figure out what the actual mileage is.Time of Day (in Ontario & Quebec)From: Study done by Germain Denoncourt and presented at the CAS RPM seminar in 2009 using public data from Montreal and QuebecThe scale of it is impressive. Night driving risk is 12x higher than that during morning commute.VT crash rate by road typeFrom: Vermont Agency of TransportationHighway driving is least risky for rural & urban. Other than highway, however, riskiness increases significantly. Without telematics, no way to obtain which road types are driven by insureds.Q: Could there be an issue for early adopters in that program implementation will be wiped out by later technology or business/product developments?A: No. Any new UBI technology or development will be incremental (such as better hardware and software), and will be available to include with an existing UBI program. What should be considered, however, is what your book will become if you never start UBI or start too late. Given the speed with which Progressive is implementing, you could only write non-standard drivers.Q: What will happen with market saturation?A: Once there are many UBI players, your program could be tailored for a certain market. There are many ways to design a program for your desired market/customers. The focus can change from discounts to value-added services. Not toe mention the improvement in the models over time. The real value in this data is where the models are going to go.Q: How can we provide value added services to customers?A: Customers have been responsive to services that provide information, safety, and security -- often through a web portal. Information services include car usage stats (e.g., MPG, driving behavior compared to everyone); safety services include car diagnostics; and, security services include stolen vehicle locators. StateFarm’s In-Drive program includes something called Vehicle X-Ray, which gives a see-through schematic of a car and highlights problematic car areas in red and operational areas in green. The driver can be notified of a maintenance or diagnostic issue from the car itself. In general, though, staying nimble is important, since new services will be developed and customer trends will change.10
12Widespread presence of personal lines programs in US Forty-six states have 4+ personal auto UBI programs implemented
13Top 50 U.S. private passenger auto companies At least eight top 10 personal auto insurers have implemented programs to insureds in at least one stateU.S. companies representing nearly 75% of the market already have programs or are actively pursuing themFrom this we see that the companies representing 60% of the market share have implemented in at least one state and they continue to add more states. By “exploring” we mean that they actually have devices in cars. They are testing and watching the market and deciding where they are going to go. “Inactive” means we are not aware of any devices in hand. It is probably safe to say that the entire market is following this, reading articles, participating in webcasts, etc.“UBI device sales rocketing from $50 million in 2011 to approximately $2.6 billion by 2015.”— FC Business Intelligence
14Telematics in personal auto Several UBI business models existMany other companies, including small companies, are moving toward implementationCompanies of all sizes and geographic distributionPlymouth RockSoCal AAAEsuranceNationwideNoCal AAAGMACTravelersAmerican FamilyThe HartfordLiberty MutualAllstateState FarmProgressiveVerified MileageSafety ServicesBehavior RatingThis is where you ask, “Where do we fit? What service(s) do we want to provide?” This is fundamental for a UBI program.“Behavior Rating” includes mileage driven as well as things like speed and hard braking.State Farm does all three with the levels they offer in their Drive Safe & Save Program.American Family uses an event detector. It is a video camera that is mounted under the rear view mirror. It records video inside and outside the vehicle a few seconds before and after an event/crash. Even though this isn’t ratable, it’s great for youthfuls and provides a value added service.The Behavior Rating field has been significantly growing. eSurance and Hartford are now in this block.
15Progressive’s consumer proposition They now offer a try it before you buy it in about 30 states.Source: Progressive website
16Progressive’s Snapshot DiscountSM – 43 states + DC Filed in PA, but withdrawnAL CO CT GA IA KS KY LA MD MI MN MO NE NV NH NJ OH OK OR RI SC SD TX WI2/23 – MT, ME, FL, VT" Nearly half a million drivers have participated countrywide to get personalized car insurance rates by sharing a picture of how they drive.” — Richard Hutchinson, UBI general manager
17Progressive’s program Optional program with customer selecting which vehicles to enrollWireless device plugged into OBD II port records time, speed and harsh brakingDiscount calculated based on first 30 days, then applied for remainder of termDevice removed after first term and discount is fixed until significant endorsementMaximum discount of 30% and no surcharge in most statesApproved in 43 states and Washington, D.C.Consumers can try before buyingProgressive uses an ODB device. They are the ONLY company collecting short term data, most likely to keep insureds happy and the UBI process simple. They have been studying this for 15 years so they have the data now to understand how to use it.Progressive has had many iterations of UBI programs. Their first was Autograph in 1997 in Houston, TX. Devices were $600! Overall, Autograph was a learning lesson. In Michigan 2004, TripSense was deployed. They included a surcharge for risky drivers and a fee for devices. Also, they used aggressive consequences for leaving the program: leaving early meant you couldn’t rejoin Progressive for 12 months! With SnapShot, however, they’ve made it extremely simple. They’re on a rampage to get as many participants before the UBI gates open. Earlier programs had a 61% discount, and now it’s 30%. The device fee is paid for in the loss cost difference.We can show you how to incorporate UBI costs into loss costs savings to fund the program.By not continuing to keep the device in the vehicle, they are limiting their ability to improve their models, react to changes in behavior and offer value-added services down the road.17
18Building a comprehensive product offering with many consumer options State Farm In-Drive®Building a comprehensive product offering with many consumer optionsExisting Drive Safe & Save Program with OnStar in fourteen statesIn-Drive® for IL and UtahNow includes Ford Sync in UtahDiscount up to 50% based on mileage, turns, acceleration, braking, speed and time of day; 40% for mileage onlyFree 6-month introductory period, and $6.99 to $11.99/month standard pricing depending on additional featuresEmergency responseStolen vehicle location assistanceVehicle diagnostic alerts and maintenance remindersSpeed alertsWebsite and smartphone app for remote and mobile accessState Farm leading the way in offering multiple “connected car” services and raising the bar with product differentiation.
19Existing smart phone integration Vehicle LocaterDaily Drive SummaryIncluding mileage, time, stops, trips and MPGReal-time Vehicle DiagnosticsBattery statusEmission statusEngine trouble codesAccident AssistanceExpedited claims handlingLocation and information documentationExample of some of the functionality in the In-Drive app.
20Example of State Farm IPhone application Example of the State Farm Driver Feedback app. Not limited to policyholders.
21Device platform for ‘added value’ customer services Emergency callUse 3D-Accelerometer and OBD speed to detect significant impactsUse cellular connection to post an SMS with detailsRequire a back-end real-time service to pick up the event and dispatch helpBreakdown serviceAbility to trigger a ‘Where am I’ SMS message from the server, to assist a customer breakdown callLimited phone capabilityTo pre-defined numbers for call center supportSatellite navigationIf linked to a PND screen in carBusiness trip logDistinguish business travel from personal useTheft serviceDetect motion without ignition start-upTracking and call for help (in extreme implementations, disable the car)Remote safe mode activationActivates Geo-fence and other driving thresholds via an SMS messageGeo-fence serviceDetect location outside boundary zoneTrigger notification (in extreme implementations, disable the car)Notification of driving exceeding other thresholds (speed, braking)Driver feedbackReal-time buzzer in car facilityReports and mapping in customer portal websiteSubscription services could enhance claims management, address fraud, subsidize cost of launch and generate revenue2121
22Shift in product vs. price focus unclear ProgressiveFEATURE FOCUS PRICE PROPOSITIONWill price remain king with more powerful risk segmentation?Price focus will require strong analytic insight with more data to create new risk factors from telematics dataOpportunity to de-commoditize the productProduct/service focus including driver coaching require an understanding of driving behavior and the key influencing factors
23UK: Insure The Box Young driver and low mileage driver proposition Pre-paid insured mileage and a retail voucher scheme. Bonus miles can be earned with good drivingInsure The Box has fitted 85,000 devices since June 2010, 6,000 new customers per monthOnline portal allows customer:To view how many miles they have used and how many remainTo view their bonus milesTo top up their mileageTo make changes to their insurance, such as change of addressTo visit ‘ShoppingBox’ to purchase items online and earn Reward MilesCompany claims “incentives reduce accidents involving young motorists by 35%-40%”Source: insurethebox .com
24Canada: Industrial Alliance “Mobiliz” Program Aimed at improving driving behavior for youthful drivers (age 16 to 24)Web portal for drivers to view dataWeekly activity report sent to driversWeb-based operations – quote, purchase, payment, claimsHard-installed deviceMonitors distance, speed, acceleration and hard brakingPremium varies monthlyDiscounts up to 25%Claims history does not impact premiumAvailable in QuebecPilot program offered only in Ontario in 2005.Source: CNW Newswire, April 12.24
25Telematics in commercial auto Implementation varies widely dependent on type and size of fleetLarge, long haul trucking has significant penetration – ~80%Small, artisan fleets - <10%Primarily used for fleet management, not insuranceMany telematics manufacturers and distributors; professional installation typically requiredAnnual maintenance provides opportunityHigh average premium justifies costCommercial auto insurers are moving quickly to catch up with personal auto insurersAt least four top 10 commercial auto insurers have implemented programs with others in exploration phaseA third of the top 50 insurers are exploring or implementing programs; the size of the segment is increasing quicklyTelematics is prevalent in fleet, and has shown to be very effective in fleet management.Commercial Auto has been more heavily involved in telematics but focused on fleet management and less so on the insurance pricing side.
27The Customer Evolution of value beyond discounts Influence drivers to improve driving behaviorPotential to save lives and significantly impact driving safetyDynamic and Flexible – creates long term customer “stickiness”Potential to significantly impact insurer profitabilityBehavioral ChangeIntroduces range of new servicesCustomers opt (and pay) for services they valueInsurers use these to differentiate productEffective and Safe Fleet OperationsValue-Added ServicesInsurance DiscountsProtecting the insured and employeesEmployer-employee relationshipsEnhances overall value of insurer/insured relationshipSimple rating based programsDiscount-driven, relying on self-selectionTargets high profit customers as they are
28Changing Driver Behaviour – Keys to Successful Program MeasurementMeasuring and interpreting driver behaviours and decision makingBased on accessible telematics data with other relevant data to put behaviours in contextMeasurementFeedbackMotivationFeedbackProviding drivers with informationFrequent and timelyAllows drivers to reduce frequency and severity of risky behavioursMotivationCreating an environment within which a driver is motivated to change behaviourBest practice tends to focus on positive reinforcement
29Evidence of improved driving Iron Mountain: 93% reduction in fleet crash rateIceland postal service reduced crash rate by 56%Pepsi (Iceland) reduced fleet crash rates by over 80%GreenRoad: 54% improvement in fleet crash rateDriveCam: 50% average reduction in crash ratesNorwich Union – 30% crash reductionThese first four examples come from commercial auto and the last are from personal auto, all have been publicly stated. Note, all these %’s are frequency reductions, but they also have a reduction in severity. This dual effect is unexpected in insurance.Insurethebox. In response to EU banning the use of rating by gender, Insurethebox sells their UBI product by claiming, “If you drive like a girl, we’ll rate you like a girl.”The graph is from a GreenRoad technologies commercial auto application. Note how after each interaction, the score improves a little bit longer.Q: What causes these reductions? Are these from driving habits, vehicle notifications, etc.?A: Most likely, the Hawthorne effect causes the reductions – the fact that you’re monitored changes your driving behavior. Also, this is so prominent in commercial auto, since they can be fired. From focus groups we have held, we have learned that drivers actually believe they are good drivers and if they are given information to refute that, they genuinely do want to become good drivers.Q: To what extent are these reductions caused from drivers knowing about real-time diagnostic and maintenance issues?A: Since fleet vehicles are routinely maintained, it’s unlikely the risk reduction comes from live diagnostic info. Hence, driving behavior is modified.Q: What value added services can be added for commercial auto?A: Information on their route such as weather, identifying dangerous intersections, and even the % of time when driving East in the morning and West at sunset.Safer drivers decrease fuel consumption roughly 10%29
31Can Mileage-based Insurance Change Our Driving Habits? Allen GreenbergU.S. Department of TransportationFederal Highway AdministrationWebinar of theState Smart Transportation InitiativeMarch 27, 2013
32What is PAYDAYS Pricing and its Relationship to Usage-Based Insurance (UBI)? Pay-as-you-drive-and-you-save (PAYDAYS) pricing converts hidden and lump-sum costs of auto ownership and usage to transparent, variable costs.Such costs may relate to insurance, but also to parking, vehicle taxes and fees, or to the car itself through car sharing.
33Why PAYDAYS Pricing?Most of the costs of owning and operating a vehicle are fixed.The financial incentive not to use personal vehicles heavily is relatively small.Many households, especially low-income ones, would prefer variable costs to fixed ones.Various studies project substantial driving reductions, public policy benefits, and consumer savings resulting from PAYDAYS pricing.
34UBI Is Not a New Concept (But Tools to Offer It Are New) As early as 1929, virtues of charging for car insurance by the mile were recognized.Concept promoted by Nobel economist William Vickery in his 1968 work: “Automobile Accidents, Tort Law, Externalities and Insurance.”
35Results of UBI Cuts vehicle miles traveled Curtails crash claims in excess of driving reductionsRelieves congestion at a rate greatly exceeding driving reductionsDiminishes air pollution and carbon emissionsLowers infrastructure costsStrengthens cities and lessens urban sprawlProvides substantial consumer savingsIncreases insurance company profits
36Features of UBI To Maximize Driving Reductions (An Objective of Some Federal Grant Funding) Direct and transparent per-mile or per-minute-of-driving pricing—avoid rebatesIn-vehicle graphic displays of “insurance pricing meter” with and Web summariesFrequent billing without automatic bill paymentTransit pass discounts for UBI customers or bundling transit passes with a few free miles of insuranceIndividualized assistance to identify alternativesPeer comparisons and “regret lotteries” to encourage continuous mileage reductions
37Research Provides Actuarial Justification for UBI Pricing Research from Massachusetts that combines vehicle mileage and loss cost data shows a compelling relationship (R2 rises 0.15 to 0.72).Host of mostly small instrumented vehicle studies consistently shows a strong linkage between certain driving habits and crashes.Actions of insurance companies also suggest actuarial underpinnings for UBI.
38Instrumented Vehicle Studies Support UBI Pricing “100-Car Naturalistic Study” in No. VA found that the 12.5% most dangerous drivers had over 100X the crash risk of the 12.5% safest drivers.An Israeli 103-vehicle monitoring study found that aggressive drivers were responsible for 16.6X the crash costs of the safest drivers.A 95-driver test of incentives to reduce speeding in Sweden led to a decline in speeding frequency from 15% to 8% of driving time.
39Typical Company Approach to Introduce UBI Pricing—Premium Discounts for Data Willing participants are likely lower riskGets data that companies need to offer an attractive UBI productPricing power comes with data control
40No Long-term SolutionCustomers will ultimately gain control of their data and use it to get competitive price quotes, as they do today for non-UBI policies.Why? Because customers have smart phones and their vehicles have OEM-installed telematics, the data will be theirs to share.A “green brand” comes from an external credible source (e.g., CERES/NRDC/EDF PAYD Insurance Product Rating System; State Climate Action Plan UBI goals tied to driving reductions).
41Evolutionary UBI Products Fail with Revolutionary Demographic Changes Changes noted in Zogby’s “The Way We’ll Be,” CCC Info Services “Crash Course 2012,” etc.:Young people delay licensure (75% of 19 year olds in 2008 v. 87% in 1983 in the U.S.), own fewer cars, live in cities, and take transit“Automobility” increasingly met through car sharing (beginning on college campuses) and “dynamic ridesharing”
42Insurance Industry Failings Auto companies respond with car sharing partner-ships; insurance companies are unresponsive.Instead of looking at peer-to-peer carsharing as a business opportunity, insurance companies threaten or hide (NY Times, 3/17/12).Consumer Federation of America Report—Low-income households forced to pay high insurance rates.
43Insurance Company and Regulator Flexibility Needed Be a leader and problem solver, not the problem.Don’t over-price new risks; find constructive approaches to reduce exposure and price.Adopt to new markets—car owners want to rent their cars to their neighbors and some renters will become owners; build business relations now.Take heed of behavioral economics and U.S. Federal pilots.
44Federally-funded Pilots (“Insurance-led” Projects) King County, WA with Unigard Insurance (company pulled out; substitute to be named)Texas DOT with MileMeter Insurance and NuRide (insurer exited; substitute to be named)MassDOT with Plymouth Rock Assurance Corp. and Conservation Law Foundation Ventures44
45Federally-funded Pilots (Insurance “Add-on” Projects) Portland, OR peer-to-peer carsharing with Getaround is supposed to include UBI for renters and ownersDriveSmart NYC, a test program to move toward mileage-based user fees (in response to declining fuel tax revenues), will include UBI45
46Comparing Federally-funded Pilots with Other UBI Products Only Federal pilots include control conditions to enable before-after comparisons.Smaller companies won funding for their pilots in part by demonstrating greater flexibility than larger companies, but launches sometimes failed.Federal pilots have required premiums to vary a minimum of 70% based on mileage, which is larger than for other products in the marketplace.46
47Comparing Federally-funded Pilots with Other UBI Products (cont.) Federal pilots require the mileage and pricing relationship to be transparent to the customer, which is not consistently so with other products.Federal pilots generally test more than one pricing protocol (e.g., rebates v. direct bill in Massachusetts), while other products do not.Federal pilots are unique in also testing add-on incentives (e.g., transit passes in Washington State and NuRide incentives in Texas).47
48Company Challenges in Participating in Federally-funded Pilots Good pilot design to measure driving changes takes work and requires creativity with customer interface and public relations.Must interact closely with a research design team, typically from a university.Internal company support and some flexibility are required throughout the entire pilot period.48
49Company Benefits from Participating in U.S. Federally-funded Pilots Reliable funding (despite occasional contracting and billing complexities), but unreliable timing.Potential for very good on-the-ground product and implementation advice from top-notch researchers and behavioral economists (advisory panel).Credible, independently verified research results on environmental, safety, and consumer equity effects lead to consumer and regulator enthusiasm.49
50Federal Government Actions to Watch UBI Request for Information (RFI) to further actuarial knowledge closed on 1/14/13. Request for Proposals to follow ($300k suggested by RFI).New insurance company partners needed for projects that are already Federally-funded ($1-$2 million).2,500-vehicle Naturalistic Driving Study is underway.Government transportation funding shortfalls lead to tests of mileage-based road user fees; could, as NYC is doing, combine with UBI tests.50
51Thank you! Allen Greenberg U.S. Department of Transportation Federal Highway Administration Congestion Management and Pricing Team New Jersey Ave., SE HOTM-1, Mail Stop E Washington, DC (202) (ph)
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