Tag Archives: marty ellingsworth

UBI Market Doubles, Reaches a Milestone

A recent report from Towers Watson shows that the world is making steady progress toward usage-based insurance (UBI). That steady growth is poised to become explosive if insurers can move faster and deal with privacy concerns while delivering UBI via smartphone apps that consume little of the battery’s charge.

The report says market penetration has nearly doubled in less than a year and a half — reaching 8.5% of U.S. drivers in July, up from 4.5% in February 2013. UBI has reached a milestone, with all 50 states now having programs available.

Consumers want the discounts that they can get by having their usage quantified and verified. Consumers are more willing than ever to work with carriers that offer UBI programs — meaning they will leave carriers that don’t.

An effective UBI program may prove to be a once-in-a-career opportunity for auto-insurance executives to resegment the market and claim a bigger share. The last time there was a change even approaching this magnitude was in the 1990s, when insurers discovered the importance of credit ratings in assessing how risky a driver is.

It’s time that we stopped measuring with a 12,000-mile-long tape measure — that being the distance that old-school insurers assume someone drives each year — and started measuring with a ruler. The mileage bands used to determine risk need to become so small that a single tank of gas could put a consumer into a new one — and the consumer needs to know that in advance so she can make a fully informed decision about how much to drive.

The $22 Billion of Auto Premiums That Will Disappear

Many drivers are angry. They only drive a little but don’t save a lot on their auto insurance.

When customers get angry, they start to shop. And when low-mile customers start to shop, they will soon find companies offering new, risk-based policies that reward them with low prices in return for their smaller exposure to claims.

That shift will take an awful lot of profitable business away from their current insurance companies. By my count, the total could be $22 billion a year in premiums.

The math goes like this:

About 25% of vehicles are driven less than 6,000 miles a year — about half the 12,000 to 13,000 miles that are assumed as the default when insurers calculate premiums. Roughly 30% of vehicles may be considered “low milers,” at less than 8,000 miles a year. If the owners of these cars earned the sort of discount they deserve, (an average of about 30%) then at scale close to $22 billion in premiums would evaporate if nothing else happened.


The premiums won’t disappear right away. For now, California is the only state that mandates the use of mileage in setting premiums. Most companies doing business there use a hodgepodge of miles bands and a tinkling of rate adjustments from low miles to higher miles. The most sophisticated insurer uses dozens of bands with a 500-mile increment. Premium discounts go as low as 50%, with a roughly 2% incline from 500 to 25,000 miles.

But the trend toward usage-based pricing has to pick up steam, both because it’s possible to measure miles driven very precisely and because so many people are overpaying.

Practically every retiree in America drives less than when she worked. If you go out and look for a used car (use Google — save some gas), you can find many a 15-year-old car with less than 75,000 miles, or five-year-old cars with less than 30,000 miles. Even if an owner of one of those 15-year-old cars received a 30% discount for low miles, he paid for 15 years and only used 10 years’ worth of insurance.

There are sure to be many counterpoints to the simple argument being made here, but all of the readers who are honest know someone who does not drive much, but who pays the full default rate like everyone else.

Let the shopping and savings begin.

Phone’s New Trick: Cheap Car Insurance

In the last decade, pilots and trials of telematics have eked out only single-digit adoption rates for usage-based insurance (UBI) among drivers, but the opportunity is now here for a breakthrough. All that is required is a smartphone.

To date, buying insurance based on actual, verified miles driven has involved installing expensive and privacy-invading tracking systems, mated to a vehicle port with a “dongle thingy,” or ghosting a cell phone’s reception turn for turn. These systems are complete overkill for verifying odometer readings.

Instead, consumers who want to get low rates because they drive few miles can verify their actual readings on a timely basis by simply periodically taking pictures of their odometers with their smartphones. An app could verify the date and ensure that the photo is of the car that is being insured.

Using a smartphone app for UBI would require insurers to leave behind their traditional approach and be much more responsive to drivers. At the moment, those insurers that offer low-mileage programs tend to just have one cutoff – for those who drive less than 7,500 miles a year – and offer them only something approaching a 10% discount off the rates for those who drive the average distance of roughly 12,000 miles a year. Yet someone who drives 5,000 miles a year should, based on industry data, get a discount of 30%. Given the sophistication of smartphone apps, drivers would expect rates to be set for actual miles driven, not just based on whether they stayed below that 7,500 cutoff. Someone who drives 3,473 miles in a year could pay just for that number.

An app could also be used to win business. The interface will help the consumer not only remember to take the picture of the odometer but could alert them when carriers in their state offer better rates for those customers who drive less. (In many states, miles are not now used in rating.)

Consumers who drive less are set to benefit hugely from telematics. All they need is the right app – and the savings on insurance could even pay the phone bill for some.

Usage-based insurance for the mass market is here.

Carriers Want Loyalty but Haven’t Earned It

Informed risk-taking is what insurance underwriting is all about. It is also how consumers and business owners navigate every financial decision every day — including whether to stick with their insurance carrier.

Insurers often mistake in-force retention for “customer loyalty,” when the reality may be that a customer is actively shopping for better value.

You cannot stop customers from shopping; you can only benefit from the fact that they want to learn more about where their money goes.

The cost of insurance is top of mind to customers, and they are now intensely seeking to lower their insurance expenses, mostly via direct channel distribution over the Internet and via telephonic access to agents.

Information drives decision making (data and analytics combined with underwriting judgment) in a process where accurate risk assessment, coupled with knowledge of expenses, lets an insurer add a profit factor to get to a market price. If the insurer’s cost structure and risk-taking appetite meet successfully with customers’ needs, then it should grow profitably. If not, then it either grows at a loss or only writes those risks in niches where it find itself competitive (either by choice or by happenstance). The need to drive down costs is the primary reason to adopt Internet and mobile-computing applications for distribution — you can follow the consumers’ own expense-minded shopping behavior as they are now accessing multiple on-line resources and then either buying online or contacting an agent (often with a mobile device).

Insurance customers see thousands of their dollars disappear to protect them from financial ruin — a “lesser of two evils” trade-off. No wonder they want to avoid spending more time and money than necessary. The traditional, intermediated marketplace for insurance keeps customers from caring which “big box” carrier provides their coverage — whether for auto, home, business or life — as long as the institution can pay any claims. In survey after survey, few customers even know who actually insures them. They only know that they are insured because they pay premiums.

Given customers’ agnosticism about who underwrites their risk, and given the state of communications and transaction technology, insurers need to be prepared for changes in how insurance is distributed. Behavioral economics have shown repeatedly that customers shop, give their time and personal data, and then cease shopping for a period while covered under a policy. But we can expect the emergence of intermediaries who can shop for a customer on an hourly, daily, weekly, monthly basis for the cost of the customer opting in for a free service (data and receiving cost-saving promotions is the only fee).

That intermediary will then auction the right to provide coverage into a competitive landscape of carriers looking for customers vs. customers accepting off-the-shelf products. With an active market and modern bill pay options, the new term of duration may be significantly less than a six-month auto policy, and now underwriters can more accurately price usage-based insurance (UBI) in real time.

Carriers have not proven themselves yet worthy of real loyalty — where the consumer won’t toss them aside in return for 15% less in premium. Perhaps carriers will never be able to win that kind of loyalty, if insurance is truly a commoditized transaction simply waiting for progress to catch up.

But if carriers aggressively push the best risk-assessment techniques to their current customers and prospects, then they may be able to win genuine customer loyalty by demonstrating that they are attuned to their customer’s individuated risk.