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

Practical Solutions to Move America Forward. 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. Executive-level Community of Practice Technical assistance Resource for the transportation community March 27, 2013 SSTI webinar

Today’s panelists Allen Greenberg FHWA Congestion Management and Pricing Team Kelleen Arquette Towers Watson March 27 2013 SSTI webinar

Can Mileage-Based Insurance Change Our Driving Habits? State Smart Transportation Initiative Webinar Kelleen Arquette March 27, 2013

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

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

Usage-based insurance (UBI) Customer Feedback Insurance Premium $1,200 $1,080 $1,000 $ 900 Insurance Premium $1,200 $1,080 $1,000 $ 900 Insurance Premium $1,200 $1,080 $1,000 $ 900 The 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 Feedback Vehicle Score VIN: 12345… Miles driven: 6,234 Event 1 per mile: .05 Event 2 per mile: .01 7

But what is the potential? Behavioral Modification Programs (teens, mature market, etc.) Infotainment Safety Features Emergency response, Roadside assistance, stolen vehicle recovery Concierge Services Door unlock, navigation, location assistance Vehicle Maintenance Reporting Green Driving and Fuel Management

Customer 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 port This is a standard port that is available in all cars manufactured in the US since 1996 Typically the port is under the driver side dash Then you drive The car transmits data through cellular networks Data is collected by the insurance company 9

Telematics data is predictive Various studies demonstrate predictive potential Companies gain competitive advantage through better segmentation Elimination 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 Mileage From: Pay-As-You-Drive Auto Insurance in Massachusetts, a 2010 report by an MIT Professor and commissioned by Insurance and Environmental groups Claim 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 Quebec The scale of it is impressive. Night driving risk is 12x higher than that during morning commute. VT crash rate by road type From: Vermont Agency of Transportation Highway 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

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

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

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 From 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

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 Plymouth Rock SoCal AAA Esurance Nationwide NoCal AAA GMAC Travelers American Family The Hartford Liberty Mutual Allstate State Farm Progressive Verified Mileage Safety Services Behavior Rating This 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.

Progressive’s consumer proposition They now offer a try it before you buy it in about 30 states. Source: Progressive website

Progressive’s Snapshot DiscountSM – 43 states + DC Filed in PA, but withdrawn AL CO CT GA IA KS KY LA MD MI MN MO NE NV NH NJ OH OK OR RI SC SD TX WI 2/23 – 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

Progressive’s 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 Progressive 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

Building a comprehensive product offering with many consumer options State Farm In-Drive® Building a comprehensive product offering with many consumer options 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 State Farm leading the way in offering multiple “connected car” services and raising the bar with product differentiation.

Existing smart phone integration Vehicle Locater Daily Drive Summary Including mileage, time, stops, trips and MPG Real-time Vehicle Diagnostics Battery status Emission status Engine trouble codes Accident Assistance Expedited claims handling Location and information documentation Example of some of the functionality in the In-Drive app.

Example of State Farm IPhone application Example of the State Farm Driver Feedback app. Not limited to policyholders.

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 21 21

Shift in product vs. price focus unclear Progressive FEATURE FOCUS PRICE PROPOSITION 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

UK: 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 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

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 Pilot program offered only in Ontario in 2005. Source: CNW Newswire, April 12. 24

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 Telematics 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.

The Future of UBI towerswatson.com 26

The Customer Evolution of value beyond discounts 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 Behavioral Change Introduces range of new services Customers opt (and pay) for services they value Insurers use these to differentiate product Effective and Safe Fleet Operations Value-Added Services Insurance Discounts Protecting the insured and employees Employer-employee relationships Enhances overall value of insurer/insured relationship Simple rating based programs Discount-driven, relying on self-selection Targets high profit customers as they are

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 Measurement Feedback Motivation 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

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 These 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

Contact information Kelleen Arquette, FCAS, MAAA (509) 258-8876 Kelleen.Arquette@towerswatson.com Towers Watson www.towerswatson.com

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

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.

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.

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.”

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

Features 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 rebates In-vehicle graphic displays of “insurance pricing meter” with e-mail 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

Research 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.

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.

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

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).

Evolutionary 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”

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 Report—Low-income households forced to pay high insurance rates.

Insurance 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.

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 44

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 45

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. 46

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). 47

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. 48

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. 49

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. 50

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-84-402 Washington, DC  20590 (202) 366-2425 (ph) Allen.Greenberg@dot.gov

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