2020 has been a tumultuous time for consumers and businesses alike. The coronavirus crisis led to nearly half of American employees working from home in the spring of this year. Pair that figure with the fact that unemployment rates climbed to nearly 15% in April 2020, and it’s easy to understand why consumers are looking for ways to reduce their expenses and stretch the dollars they have. And why some insurance companies are making unprecedented moves.
Numerous auto insurance providers took steps to reduce premiums or issue partial refunds to customers in light of the COVID-19 pandemic, but consumers are still on the hunt for savings. Those one-time deals might not be enough. According to a recent study, online demand for new insurance policies has gone up by 27% since March.
Without a daily commute for the foreseeable future, consumer interest in pay-per-mile coverage is on the rise
A recent survey by J.D. Power revealed that more than 40% of consumers were interested in telematics-based auto insurance options. This survey was released in May, early in a pandemic that many hoped would be quickly squashed. With COVID-19 cases once again spiking in some states, the interest could be even higher, because customers only want to pay for as much coverage as they use.
Despite the appeal, true pay-per-mile policies aren’t offered across the board. At present, only a few carriers offer pay-per-mile insurance and determine premiums according to a mileage fee plus a base rate. Also, the potential savings from a pay-per-mile program may not be quite as high as consumers expect. Drivers who log an average of more than 1,000 miles per month (12,000 miles per year) on the road could end up paying more than they would with a traditional auto insurance policy.
Increased interest means it may be time for more carriers to consider pay-per-mile insurance as a way to avoid customer turnover while increasing potential revenue.
While consumers may be interested in the option, some insurers’ hands are tied. Providers cannot offer these types of policies without first getting approval from each individual state’s department of insurance. In addition, privacy concerns and state regulations can make it difficult or costly for insurance companies to implement telematics-based programs in certain states. At present, usage-based car insurance policies are only available to residents in a little over half of the U.S.
With pay-per-mile insurance, the industry may experience:
Fewer payouts. Drivers who sign up for mileage-based car insurance policies may also be more cognizant of their driving habits, speculates Andrew Hurst, insurance analyst at ValuePenguin. More-aware drivers should create safer roads for everyone — and potentially fewer payouts for insurance providers as a bonus.
Reduction of fraudulent claims. Usage-based insurance could also lead to a reduction in fraud, according to the National Association of Insurance Commissioners (NAIC). Details that insurance companies collect from telematics devices can make it easier to estimate damages and review the actual facts (i.e., speed, time of incident, hard braking, etc.) when accidents take place.
More insight into driving behaviors. Telematics tracking could also help an insurer identify individual drivers who should possibly pay higher premiums due to risk. Progressive reveals, for example, that it increases the premiums of around two in 10 drivers who sign up for its Snapshot program due to risky driving habits. However, Hurst said, “I’m not so sure this would be worthwhile in the long run, as customers could simply leave and go to an insurer that didn’t do that.”
Pay-per-mile coverage and the future
Thanks to a number of factors, traditional auto insurance rates are likely to rise in 2020. Higher repair costs on tech-heavy vehicles, more accidents from distracted drivers and natural disaster-induced claims are partially to blame.
At the same time, consumer desire for lower premiums and usage-based options is on the rise. So, the insurance industry may need to find other ways to appeal to price-sensitive drivers while still controlling risk and overall costs.
It’s 2028. The world’s population stands at more than 8 billion. In the past decade, we’ve added a billion people, and we’re living in a hyper-connected world.
Our smart tools are diagnosing a growing number of conditions—taking your pulse and counting steps was just the beginning; the smart tools of 2028 detect all kinds of vitals to accurately diagnose a number of ailments and diseases.
Even our roads have changed. Today’s glass-topped highways are beautiful stretches of solar roadways embedded with a multitude of sensors aligned with the self-driving cars traveling on them, preventing accidents.
Insurers have figured out ways to underwrite and insure all that autonomy in all of its different modes. The same is true for transportation-as-a-service. And, we’re already discussing how to regulate and insure the next generation of vehicles – custom, 3D-printed, flying cars.
The pace at which all of this has happened is amazing. But the big question is, how did we get here?
In a word, telematics.
Telematics – aka the Internet of Things – changed everything since it started interacting with all of our lives years ago. For insurance, it started with underwriting and data monetization. And, although there were a lot of interesting early results, there wasn’t a lot of uptake or market success.
That all started to change in 2018.
Data exchanges started to come out. Telematics data (from OEMs, mobile devices or OBDII devices) started to funnel into one place, normalized and ready for insurance companies to use to make attractive offers to subscribers. Insurers could also use the data to innovate.
At the time, CCC was already working with its data exchange, CCC X. Our systems had already processed more than 50 billion driver miles. In retrospect, that time really was the turning point for telematics. As an industry, we saw the checkerboard get filled up—slowly at first—by forward-thinking companies that were making investments in telematics technology. 2018 was a turning point for the auto insurance industry.
The real tipping point started to come when we looked at other use cases for telematics data. Those cases vastly increased the adoption of the technology and made it much more mainstream. On top of that, telematics was combined with other technologies and innovations of that time, and that was what really sent us on a rocket ride.
When early use cases evolve, things get exciting
In 2006, cell phones were mainly used by people making phone calls. Remember how fast it all changed when the first smartphone came out? What really made cellular technology take off was when the smartphone became your calendar, your music collection, your newspaper. It became how you bought products. It was everything, and everyone had to have one. And remember the companies that were slow to adopt? They had a tough time.
In 2018, it was exactly the same with telematics. New use cases opened up the future and enabled innovation.
In April of that year in Cypress, Texas, CCC began working with State Auto to ingest telematics that would enable connected claims. With a flip of a switch, a 100-year-old accident triage process was changed. Suddenly, State Auto knew about a crash seconds after it happened. And what did they do? They picked up the phone, called their customer and said, “We see you’ve been in a crash. How can we help?”
One hundred years of process was flipped on its head overnight. Customers were amazed. That was the beginning of when people started to ask themselves about how things were done.
The moment when change happens
Up until this point, the three fundamentals of the insurance process were set in stone: I own my car, I drive my car, I call my insurance company when I get into an accident. After telematics, people started to think differently.
I own my car. Do I? Remember, new modes for transportation as a service and driving subscriptions, among other innovations, started to become a more widespread conversation. People started to consider that maybe they didn’t need to own a car.
I drive my car? Do I? 2018 was also right around the time when self-driving cars and taxis started hitting the streets of Singapore, Tokyo and Las Vegas. Maybe I don’t have to drive my car?
I call my insurance company when I get into an accident. Should I? As mentioned, on April 26, 2018, we found that maybe that was no longer necessary or always true.
Another flashback. In 2018, we also introduced the capability to determine injuries from telematics-powered crash dynamics. We used the data to understand the principles of force and delta V and used that to detect what kinds of injuries the people in the car may have, the potential severity of those injuries and what the range of medical treatments would likely be. That came together to allow our customers to treat people with the same efficiency and process as we were able to repair the car.
Finally, around this time telematics was applied to the repair. Cars were getting a lot more complicated, and there were a lot more sensors, more diagnostic trouble codes (DTCs), etc. Cars were capable of sending data right from their computers straight to the repair shop to make repair faster and more accurate, helping to ensure those increasingly complex cars were getting fully repaired and safely returned to the road. The change greatly expanded the use of telematics.
But what really lit the match was when those telematics use cases started being combined with other innovations of that period.
Photo analytics in estimating? Check. Insurers were already using AI to instantly detect from one photograph the likelihood a car was repairable or a total loss. AI was used to build the estimates themselves, using photographs and the help of telematics data.
From there, mobile and smart technologies enabled the detection of an accident all the way through to the disposition of the vehicle. The experience was self-guided and highly efficient. The person in the car accident was interacting with shops and insurance companies to get the job done in a streamlined way.
All of these new possibilities were suddenly at our fingertips. That crash in Cypress, Texas, if it was serious enough, would have the tow truck quickly dispatched to pick the car up. Or, if the injuries were serious, an ambulance could get there more quickly, saving the customer’s life.
After 2018, the acceleration of technology innovation went through the roof. That’s how we got to the world we live in today. We were struck with this awareness of exactly how telematics and photo analytics are going to lead to a new world order. The future became clear.
Those that got in early with those data exchanges and started using telematics for UBI purposes started to gain an understanding of data and chip away at the learning curve. They improved their book of business. They added use cases, detected crashes and delivered better injury disposition for customers and better repairs.
Those experiences and that knowledge base got them to a point that, when the autonomous vehicles started coming in all different modes and configurations, they were ready to price the risk. When the transportation as a service option started coming up, they were ready to go.
Innovation is always the same. It doesn’t matter if it’s 2018 or 2028 or 2058. The timeless advice about innovation is this: You need to adopt as early as possible. You need to give yourself permission to fail, the opportunity to learn and the time to get it right. When that match gets lit, you are ready to take the rocket ride to the future. Stay brave and power forward.
Usage-based pricing is a fascinating topic for insurers. A technology that allows persistent monitoring of risk exposure during the coverage period could potentially enable insurers to price each risk at the best rate.
The potential, however, is not the reality.
In 2017, 14 million policies sent telematics data to insurers around the world, of which 4.4 million were in the U.S market, based on an estimate by the IoT Insurance Observatory, an insurance think tank that has aggregated almost 50 insurers, reinsurers and tech players between North America and Europe. (In the U.S., there were a further 3.6 million policies that are still active and commonly defined as telematics but that in the past had a dongle only and didn’t send any data to insurers last year.)
However, less than 9% of the global insurance telematics policies were characterized by usage-based pricing, which is a mechanism that charges the policyholders for the current period of coverage based on how they behave (mileage or driving behavior) during this period.
Instead, the vast majority of the telematics policies bought by customers around the world today have a defined up-front price for the current policy term. Moreover, the telematics data registered during the policy period does not affect this price in any way, and is used only for proposing a renewal price at the end of the policy. So, these policies are not usage-based because at the beginning of each policy term the customers are sure about the amount they are going to pay for the policy, regardless of their behavior during the months of coverage.
These existing implementations of telematics-based pricing are somewhat validated from consumer perceptions toward insurance. In a survey of 1,046 U.S. consumers, the Casualty Actuarial Society Insurance On-Demand Working Party has addressed and demystified some of the behavioral economics assumptions on the insurance products. The research showed that only 32% of consumers reviewed their personal lines (auto and home) coverage more than once per year. Furthermore, 89% of consumers said they would rather pay a single, stable price per year compared with paying per usage without a certainty of total price. Usage-based auto insurance, across the entire on-demand category studied by the working group, is attractive to people penalized by traditional insurance products, that is, consumers with low usage who would otherwise have to pay for more coverage than they need.
Potential and Success Stories
The usage-based approach persistently monitors the policyholders and charges (potentially) each customer a rate commensurate with actual exposure, minimizing the premium leakage in each coverage period. The resulting minimized earning volatility from usage-based pricing allows insurers to increase the leverage and through this to improve investment return and the return on equity of the company. This approach also allows for increased retention of good risks, at any pricing level, which are penalized by competitors with less accurate pricing mechanisms. The quality of the portfolio is improved (with more profitable customers) at each renewal.
The resulting lower volatility from usage-based pricing and better quality of the portfolio over time would also enable insurers to negotiate lower reinsurance costs.
But while usage-based insurance could theoretically be a profitable option for insurers, the problem seems to be the lack of customer demand for an insurance product where there isn’t a defined up-front price for all the entire coverage period..
Newcomers to the insurance market are bringing a different perspective to the problem, recognizing that small clusters of drivers who have been heavily penalized by the current insurance rates—such as extremely low-mileage drivers, or extremely safe drivers without a credit score—could be enough to start a niche business. There are a few success stories of insurtech startups, such as Insure The Box and Metromile, which have been able to build portfolios around 100,000 policies and relevant company evaluations within six to seven years.
Driving Scores at the Underwriting Stage
One way to combat the lack of market fit that has affected the usage-based adoption could be to use a driving score at the underwriting stage. This way, insurers will make an up-front quotation by using—together with traditional data—the driving data.
The value created through this approach is clear and similar to experiences the sector has had integrating new risk factors (e.g. credit scoring) in pre-existing risk models. This telematics-enhanced risk model enables more accurate pricing. This, in turn, allows insurers to generate favorable selection by attracting the best risks for each pricing level (leaving the worst to the competitors). Through the creation of smaller and more homogeneous clusters of clients, this approach even reduces premium leakage, reducing the volatility. And, if the driving score is used at each renewal, there is a chance of improving portfolio quality over time (at any pricing level), with insurers using driving scores for underwriting, benefiting from retention of the most profitable customers–those who are penalized by competitors with less accurate pricing mechanisms.
The ROI of this approach is extremely positive, but the current scenario for obtaining the customer driving score seems very different from the scenario we have known for the credit score. The credit score (or the granular data necessary to calculate it) is available on the entire customer base and certified by reliable third parties, so each insurer can gather this data any time a customer requests a quotation via an agent, a broker, a call center or even online. Moreover, anyone who doesn’t have a credit score is considered a nonstandard risk. So, the concretization of the driving score dream requires the availability and reliability of third-party data for the insurers and, most importantly, the creation of frictionless purchasing processes for the clients.
Data exchanges, which bring OEM data to insurers, have been present in the U.S. customer market for a few years, but because there are many points of friction throughout OEM funnels, they still represent only 2% of the U.S. telematics insurance portfolio. This customer fatigue is due to the need to opt in to request a quotation. Eligibility for the opt-in comes in a moment when he is not shopping around for insurance coverage (a few months after the purchase of the new car). The quotations, which are done with anonymized data, are only indicative, so the customer needs to add data later to receive the real proposal.
Try Before You Buy
A different way to concretize the wish to access a driving score any time an insurance price quotation is calculated is by using a try-before-you-buy app. Given the current level of smartphone penetration, such an app likely provides an easier way to address a large part of the market than with the data exchanges and may also reduce customer frictions. As insurtech carrier Root is currently doing, an insurer can ask a prospect to download an app on his smartphone, calculate the driving score through collected data and, after a while, calculate the quotation incorporating the customer’s driving score. Using this approach, this less-than-two-year-old auto carrier startup wrote 1.5 times more premium than the more-talked-about carrier Lemonade. (Both are insurtech carriers, although Lemonade is writing renters insurance, and Root is writing auto). Root even entered in the insurtech unicorn club in August, thanks to a $100 million round of funding raising the valuation to $1 billion.
Tailored renewal price
As mentioned, 90% of the current global telematics policies only use the driving data for tailoring the renewal price to the customers after having monitored them for a few months (rollover approach) or for the entire coverage period (leave-in approach).
Are insurers achieving any economic value through this pricing approach?
They can increase the retention of the most profitable risks at each pricing level by providing a discount at renewal. However, this additional discount reduces the profitability of these policyholders. So the chance to create some value through this “discounted retention” is linked to the presence of a high-level churn rate. If surcharges to the worst risks at each pricing level are added, insurers will have the opportunity at renewal to partially reduce the premium leakage they have identified on these risks, or push some of them toward competitors.
The accompanying chart (right side) summarizes these pricing thoughts: The expected ROI of the “discount at renewal” is definitely lower than the driving score scenario—it structurally misses the ability to have a positive up-front selection by attracting the better risks at each pricing level—but it is positive if surcharges are added.
The IoT Insurance Observatory has found that a large portion of the policies using driving data for tailoring renewal prices have not resulted in any bad driver penalties.
So, are these telematics portfolios destroying value instead of creating it?
The reality is that there is value created on these portfolios, but the value is not tied to pricing. And some of the pricing approaches are even reducing that value.
First, there are many examples of the risk self-selection impact of all the telematics-based products around the world. Even if two customers seem to be equal based on their characteristics, the one who accepts the telematics product has a lower probability of generating a loss. The stronger the monitoring message on the product storytelling, the higher the self-selection effect. The most statistically robust study is on the Italian auto insurance market, where this risk self-selection effect has accounted for 20% of the claim frequency. In this market, telematics products currently represent more than one-fifth of the personal lines auto insurance business, and the storytelling of the product is hugely focused on monitoring and customer support at the moment of a crash.
Other than risk self-selection, three other telematics-based use cases have been exploited by insurers.
Some international insurers have reinvented their claims processes through telematics data: Their new paradigm is fact-based, digital and real-time. Insurers such as UnipolSai have introduced tools for their claim handlers that allow a quicker and more precise crash responsibility identification and have been providing precious insights to support the activity of all the actors involved in the claim supply chain (both loss adjusters and doctors).
A second well-demonstrated telematics use case is the change of driver behavior. VitalityDrive introduced by the South African insurance company Discovery Insure is the first insurance telematics product entirely focused on promoting safer behavior. All the product features—from gas cash-back (up to 50% of fuel spending per month) to active rewards through the app (including coffee, smoothies and car wash vouchers)—are contributing to the risk reduction of the book of business and to increased retention of the best risks.
Both the Italian and South African experiences have even been characterized by the insurers’ ability of enhancing the insurance value proposition by adding telematics-based services bundled to the auto insurance coverage. The fees paid by customers for these services almost offset all the costs of the telematics services on the insurers’ income statements
Based on the experience of the IoT Insurance Observatory, global insurance telematics best practices have generated more value through these four use cases than through pricing as of today. So, the sum of the self-selection effect, the claim cost reduction and the economic impact of changes of behavior allows an insurer to provide an important up-front discount at the same level for all the new telematics-based policyholders.
This relevant level of up-front discount — 20% or more — has been able to drive the adoption (overcoming any eventual customer privacy skepticism) because it fits with the customer desire to save money, contrasting the low adoption rates generated for more than a decade in the U.S. where up-front discount offers are typically only 5%.
The discount should be maintained, on average, at the same level at the renewal stage. Moreover, an additional economic value can be generated—at each pricing level—by providing additional discounts to the best policyholders and reducing the discount to the worst ones.
This is what the international best practices are doing today.
The Internet of Things (IoT) is predicted to support more than 20 billion devices by 2020, according to Gartner. This is a market that covers 60% of consumers worldwide, creating huge opportunities for industries to connect and engage with their customers.
Connecting with consumers hasn’t always been easy. Contact typically took place at points of sale, during claims and during renewal periods. Now, with the use of wearables, smart homes and telematics, insurers are connecting with customers on a continual basis and providing valuable feedback – and prices – based on activity levels. The business of insurance is complex, with core factors such as risk evaluation, long-term contracts and unpredictable settlements. However, the benefits of insurtech and the unlimited availability of new sources of data that can be exploited in real time have fundamentally altered how consumers interact with their insurance providers.
IoT devices are helping consumers and insurers get smarter with each passing day as these technologies bring promising results in helping insurers reshape how they assess, price and limit risks and enhance customer experience.
Numerous technologies have shown how improved connectivity can generate opportunities in the insurance industry beyond personalized premium rates. If implemented properly, IoT applications could possibly boost the industry’s customarily low growth rates. It may help insurers break free from traditional product marketing and competition primarily based on price to shift toward customer service and differentiation in coverage.
Several technology trends that are increasing connectivity in insurance include:
Extended Reality (XR) — XR technologies are altering the way consumers connect with society, information and each other. Extended reality is achieved through virtual reality (VR) and augmented reality (AR), which aim to “relocate” people in time and space. Eighty-five percent of insurance executives in Accenture’s Technology Vision 2018 survey believe it is important to leverage XR solutions to close the gap of physical distance when engaging with employees and customers.
Wearable Sensors — Reports indicate that the average consumer now owns 3.6 wearable devices. These technologies can mitigate claims fraud and also transmit real-time data to warn the insured of possible dangers. For example, socks and shoes with IoT apps can alert diabetics on possible odd joint angles, foot ulcers and excessive pressure, thus helping in avoiding costly disability and medical claims and even worst-case scenarios such as life-changing amputations.
Commercial Infrastructure and Smart Home Sensors — These sensors can be embedded in commercial and private buildings to help in monitoring, detecting and preventing or mitigating safety breaches such as toxic fumes, pipe leakage, fire, smoke and mold. This increases the possibility of saving insurers from large claims and homeowners from substantial inconveniences such as lost property or valuables. Savings can be passed to insureds who use these sensors.
Usage-Based Insurance (UBI) Model — Cellular machine-to-machine (M2M) connectivity and telematics link drivers and automobiles in entirely new ways. Traditionally, auto insurance has relied on broad demographic features such as gender and the driver’s age, plus a credit score, to set premiums. Now, through IoT devices, insurers can not only offer reward-based premiums but can provide a connected car experience to customers with feedback on weather, traffic conditions or driving habits.
Strategy will play an important role in connectivity as insurance carriers transform legacy core systems into digital platforms that support deeper connectivity with their customers. This strategy must address a carrier’s ability to handle, process and analyze the new types of data that will emerge from the use of these technologies. Artificial intelligence will also have a big impact.
According to a recent study, 80% of insurance customers are happier and more content when they can connect with their insurance providers through various channels such as phone, emails, smartphone apps and online. Through the use of the IoT and connected devices, insurers will improve customer experience by shifting from reaction after an event has occurred to preventing losses digitally.
I recently attended a telematics event in Brussels and had an interesting discussion about the future of on-board diagnostics (OBD) in auto insurance. I have been in the European telematics usage-based insurance (UBI) space for a long time and have seen all sorts of solutions adopted by insurers when launching programs to consumers: hidden black boxes, windscreen devices, battery-mounted devices and tags, all with different types of success.
I have rarely seen OBDs succeed. In theory, there are benefits from reading vehicle data and being connected to the car, but the reality has proven massively different.
First of all, OBDs prove to be inconvenient for consumers. Each vehicle has a different position for the port, and unless consumers are carefully guided they simply won’t find it. If they do, the ports can be in inconvenient places, which either makes the device an eyesore in the car or annoying because it can detach when the driver gets into and out of the car. Some less-expensive OBD models, without GPS and GSM, can be paired with phones, but even this experience has never been straightforward due to different Bluetooth standards. So the promise of self-installing really did not work out.
Car manufacturers don’t help the situation. They continuously update their vehicle software, which can cause compatibility problems for OBD makers every time a new model comes to market. Guess who discovers this first? Consumers.
OBDs proved to be inconvenient for insurers. When insurers launch a new UBI program, they want to make sure the data is standardized across all available vehicles. But with all their issues with compatibility and installation, OBDs in Europe have never been able to deliver the standardization that make the driving data interesting for insurers on a large scale.
OBDs have had some success in countries like the U.S., mainly due to different OBD data standards, bigger cars and more consumer awareness. But even in the U.S., insurers are abandoning OBDs for smartphones, which can provide better customer experiences and adoption rates.
But perhaps most damaging of all, car makers are starting to limit access to the OBD port to protect consumers from hackers and bad experiences. Ultimately, the port has been created for diagnostics purposes years ago but lately used by hardware providers for different purposes. Organizations interested in accessing vehicle data will probably be driven by OEMs directly to access driving data from the cloud with highly secure access systems – not from the vehicle itself.
This is why we won’t see many insurers launching new OBD-based UBI programs.