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Prospects for mileage-based insurance SSTI webinar series March 27, 2013 Presented by SSTI March 27, 2013.

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Presentation on theme: "Prospects for mileage-based insurance SSTI webinar series March 27, 2013 Presented by SSTI March 27, 2013."— Presentation transcript:

1 Prospects for mileage-based insurance SSTI webinar series March 27, 2013 Presented by SSTI March 27, 2013

2 Executive-level Community of Practice Technical assistance Resource for the transportation community SSTI webinar2 State Smart Transportation Initiative Practical Solutions to Move America Forward. A network of reform-oriented state DOTs, founded in 2010 and housed at the University of Wisconsin. March 27, 2013

3 SSTI webinar3 Todays panelists March Allen Greenberg FHWA Congestion Management and Pricing Team Kelleen Arquette Towers Watson

4 © 2013 Towers Watson Global. All rights reserved. Can Mileage-Based Insurance Change Our Driving Habits? State Smart Transportation Initiative Webinar Kelleen Arquette March 27, 2013

5 What is UBI? towerswatson.com 5 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

6 towerswatson.com Usage-based auto insurance What it is A device collects real-time driving data Date and time, trip duration, speed, turning forces, and even location (optional) Additional data can be merged including weather, traffic, and more Data is sent to the insurance company who uses it to rate the driver on actual driving behaviors What it offers insurers Enhanced risk segmentation & improved pricing accuracy Reduced loss costs & reduction in claims Increased consumer retention & satisfaction Product differentiation & brand awareness 6

7 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com 7 Usage-based insurance (UBI) Insurance Premium $1,200 $1,080 $1,000 $900 Insurance Premium $1,200 $1,080 $1,000 $900 Company Feedback Vehicle Score VIN:12345… Miles driven:6,234 Event 1 per mile:.05 Event 2 per mile:.01 Customer Feedback Insurance Premium $1,200 $1,080 $1,000 $900

8 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com But what is the potential? 8 Safety Features Emergency response, Roadside assistance, stolen vehicle recovery Vehicle Maintenance Reporting Green Driving and Fuel Management Behavioral Modification Programs (teens, mature market, etc.) Infotainment Concierge Services Door unlock, navigation, location assistance

9 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Customer Installation Experience 9

10 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com 10 Telematics data is predictive Various studies demonstrate predictive potential Companies gain competitive advantage through better segmentation Elimination of cross-subsidization is more fair

11 Market Update towerswatson.com 11 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

12 towerswatson.com 12 Widespread presence of personal lines programs in US Forty-six states have 4+ personal auto UBI programs implemented

13 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com 13 Top 50 U.S. private passenger auto companies At least eight top 10 personal auto insurers have implemented programs to insureds in at least one state U.S. companies representing nearly 75% of the market already have programs or are actively pursuing them UBI device sales rocketing from $50 million in 2011 to approximately $2.6 billion by FC Business Intelligence

14 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com 14 Telematics in personal auto Several UBI business models exist Many other companies, including small companies, are moving toward implementation Companies of all sizes and geographic distribution Verified Mileage Safety Services Behavior Rating Plymouth Rock SoCal AAA Esurance Nationwide NoCal AAA GMAC Travelers American Family The Hartford Liberty Mutual Allstate State Farm Progressive

15 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com 15 Progressives consumer proposition Source: Progressive website

16 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com 16 Progressives Snapshot Discount SM – 43 states + DC " 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

17 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com 17 Progressives program Optional program with customer selecting which vehicles to enroll Wireless device plugged into OBD II port records time, speed and harsh braking Discount calculated based on first 30 days, then applied for remainder of term Device removed after first term and discount is fixed until significant endorsement Maximum discount of 30% and no surcharge in most states Approved in 43 states and Washington, D.C. Consumers can try before buying

18 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com 18 State Farm In-Drive® Existing Drive Safe & Save Program with OnStar in fourteen states In-Drive® for IL and Utah Now includes Ford Sync in Utah Discount up to 50% based on mileage, turns, acceleration, braking, speed and time of day; 40% for mileage only Free 6-month introductory period, and $6.99 to $11.99/month standard pricing depending on additional features Emergency response Stolen vehicle location assistance Vehicle diagnostic alerts and maintenance reminders Speed alerts Website and smartphone app for remote and mobile access Building a comprehensive product offering with many consumer options

19 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com 19 Existing smart phone integration Vehicle Locater Daily Drive Summary Including mileage, time, stops, trips and MPG Daily Drive Summary Including mileage, time, stops, trips and MPG Real-time Vehicle Diagnostics Battery status Emission status Engine trouble codes Real-time Vehicle Diagnostics Battery status Emission status Engine trouble codes Accident Assistance Expedited claims handling Location and information documentation Accident Assistance Expedited claims handling Location and information documentation

20 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com 20 Example of State Farm IPhone application

21 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com 21 Device platform for added value customer services Emergency call Use 3D-Accelerometer and OBD speed to detect significant impacts Use cellular connection to post an SMS with details Require a back-end real-time service to pick up the event and dispatch help Breakdown service Ability to trigger a Where am I SMS message from the server, to assist a customer breakdown call Limited phone capability To pre-defined numbers for call center support Satellite navigation If linked to a PND screen in car Business trip log Distinguish business travel from personal use Theft service Detect motion without ignition start-up Tracking and call for help (in extreme implementations, disable the car) Remote safe mode activation Activates Geo-fence and other driving thresholds via an SMS message Geo-fence service Detect location outside boundary zone Trigger notification (in extreme implementations, disable the car) Notification of driving exceeding other thresholds (speed, braking) Driver feedback Real-time buzzer in car facility Reports and mapping in customer portal website Subscription services could enhance claims management, address fraud, subsidize cost of launch and generate revenue

22 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Will 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 data Opportunity to de-commoditize the product Product/service focus including driver coaching require an understanding of driving behavior and the key influencing factors FEATURE FOCUS PRICE PROPOSITION 22 Shift in product vs. price focus unclear Progressive

23 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com UK: Insure The Box 23 Young driver and low mileage driver proposition Pre-paid insured mileage and a retail voucher scheme. Bonus miles can be earned with good driving Insure The Box has fitted 85,000 devices since June 2010, 6,000 new customers per month Online portal allows customer: To view how many miles they have used and how many remain To view their bonus miles To top up their mileage To make changes to their insurance, such as change of address To visit ShoppingBox to purchase items online and earn Reward Miles Company claims incentives reduce accidents involving young motorists by 35%-40% Source: insurethebox.com

24 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com 24 Canada: Industrial Alliance Mobiliz Program Aimed at improving driving behavior for youthful drivers (age 16 to 24) Web portal for drivers to view data Weekly activity report sent to drivers Web-based operations – quote, purchase, payment, claims Hard-installed device Monitors distance, speed, acceleration and hard braking Premium varies monthly Discounts up to 25% Claims history does not impact premium Available in Quebec Source: CNW Newswire, April 12.

25 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com 25 Telematics in commercial auto Implementation varies widely dependent on type and size of fleet Large, long haul trucking has significant penetration – ~80% Small, artisan fleets - <10% Primarily used for fleet management, not insurance Many telematics manufacturers and distributors; professional installation typically required Annual maintenance provides opportunity High average premium justifies cost Commercial auto insurers are moving quickly to catch up with personal auto insurers At least four top 10 commercial auto insurers have implemented programs with others in exploration phase A third of the top 50 insurers are exploring or implementing programs; the size of the segment is increasing quickly

26 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com The Future of UBI towerswatson.com 26

27 Proprietary and Confidential. For Towers Watson and Towers Watson client use only. The Customer Evolution of value beyond discounts Behavioral Change Effective and Safe Fleet Operations Value-Added Services Insurance Discounts Simple rating based programs Discount-driven, relying on self-selection Targets high profit customers as they are Introduces range of new services Customers opt (and pay) for services they value Insurers use these to differentiate product Protecting the insured and employees Employer-employee relationships Enhances overall value of insurer/insured relationship Influence drivers to improve driving behavior Potential to save lives and significantly impact driving safety Dynamic and Flexible – creates long term customer stickiness Potential to significantly impact insurer profitability

28 Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Changing Driver Behaviour – Keys to Successful Program Measurement Measuring and interpreting driver behaviours and decision making Based on accessible telematics data with other relevant data to put behaviours in context MeasurementFeedbackMotivation Feedback Providing drivers with information Frequent and timely Allows drivers to reduce frequency and severity of risky behaviours Motivation Creating an environment within which a driver is motivated to change behaviour Best practice tends to focus on positive reinforcement

29 Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 29 Evidence of improved driving Iron Mountain: 93% reduction in fleet crash rate Iceland postal service reduced crash rate by 56% Pepsi (Iceland) reduced fleet crash rates by over 80% GreenRoad: 54% improvement in fleet crash rate DriveCam: 50% average reduction in crash rates Norwich Union – 30% crash reduction Safer drivers decrease fuel consumption roughly 10%

30 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com 30 Contact information Kelleen Arquette, FCAS, MAAA (509) Towers Watson

31 Can Mileage-based Insurance Change Our Driving Habits? Allen Greenberg U.S. Department of Transportation Federal Highway Administration Webinar of the State Smart Transportation Initiative March 27, 2013

32 What 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.

33 Why 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.

34 UBI 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.

35 Results of UBI Cuts vehicle miles traveled Curtails crash claims in excess of driving reductions Relieves congestion at a rate greatly exceeding driving reductions Diminishes air pollution and carbon emissions Lowers infrastructure costs Strengthens cities and lessens urban sprawl Provides substantial consumer savings Increases insurance company profits

36 Features of UBI To Maximize Driving Reductions (An Objective of Some Federal Grant Funding) Direct and transparent per-mile or per-minute-of-driving pricingavoid rebates In-vehicle graphic displays of insurance pricing meter with and Web summaries Frequent billing without automatic bill payment Transit pass discounts for UBI customers or bundling transit passes with a few free miles of insurance Individualized assistance to identify alternatives Peer comparisons and regret lotteries to encourage continuous mileage reductions

37 Research Provides Actuarial Justification for UBI Pricing Research from Massachusetts that combines vehicle mileage and loss cost data shows a compelling relationship (R 2 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.

38 Instrumented 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.

39 Typical Company Approach to Introduce UBI Pricing Premium Discounts for Data Willing participants are likely lower risk Gets data that companies need to offer an attractive UBI product Pricing power comes with data control

40 No Long-term Solution Customers 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).

41 Evolutionary UBI Products Fail with Revolutionary Demographic Changes Changes noted in Zogbys The Way Well 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

42 Insurance 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 ReportLow- income households forced to pay high insurance rates.

43 Insurance Company and Regulator Flexibility Needed Be a leader and problem solver, not the problem. Dont over-price new risks; find constructive approaches to reduce exposure and price. Adopt to new marketscar 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.

44 44 Federally-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 Ventures

45 45 Federally-funded Pilots (Insurance Add-on Projects) Portland, OR peer-to-peer carsharing with Getaround is supposed to include UBI for renters and owners DriveSmart NYC, a test program to move toward mileage-based user fees (in response to declining fuel tax revenues), will include UBI

46 46 Comparing 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.

47 47 Comparing 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).

48 48 Company 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.

49 49 Company 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.

50 50 Federal 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.

51 Thank you! Allen Greenberg U.S. Department of Transportation Federal Highway Administration Congestion Management and Pricing Team 1200 New Jersey Ave., SE HOTM-1, Mail Stop E Washington, DC (202) (ph)

52 SSTI webinar52 Thank you for attending this webinar! March This presentation will be available on the SSTI website later today. For more information on SSTI or our work, or to subscribe to our newsletter, visit our website:

53 SSTI webinar53 Thank you for attending this webinar! March QUESTIONS?


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