Usage-based insurance is a consumer deception. It is a shell game being foisted on consumers to lure them into allowing their car insurance company to glance over their shoulder as they drive and determine their insurance rate based on direct observation of their driving behavior.
UBI programs will no doubt be the focus of the upcoming Insurance Telematics Europe 2013 event in London May 7-8. The focus on UBI at this event is appropriate as the UK remains a source of critical leadership in bringing UBI to the mass market, something that has eluded all other geographies, including the U.S.
The failure of UBI programs to capture the imagination of the consumer lies in its deceptive quality. The deception lies in the assumption that insurance companies know anything about what constitutes safe driving. But it is actually worse than that, because insurance companies are only allowed to use a limited set of data, depending on the regulatory jurisdiction, to draw their underwriting conclusions.
The attraction of usage-based insurance, or UBI, is that it is a potentially superior tool for determining rates than the existing models derived from driving history, credit scores, and demographic data. UBI is also attractive to insurance companies trapped in a low growth increasingly low margin industry, because it allows them to draw away the lowest risk drivers from competitors while giving longer term customers a reason not to change.
Regulatory authorities and governments also like UBI programs because the participants tend to drive less, reducing congestion, carbon emissions and the potential for collisions and expensive claims. For young drivers or drivers with poor driving histories UBI programs, allowing remote tracking or monitoring, may be the only means of obtaining affordable insurance.
Strategy Analytics' own research has shown the highest level of interest in UBI programs among younger demographic segments in Europe and the U.S. (Consumer Interest in Usage-based Insurance - http://tinyurl.com/blfq84q)
In Europe, where regulators have banned gender bias in car insurance underwriting, UBI may be an attractive work-around. And pay-as-you-drive programs based almost entirely on mileage, have also emerged for drivers who simply don’t drive much and, therefore, shouldn’t have to pay the same rates as those who drive more.
But the shortcomings of UBI programs are many and those shortcomings have limited the adoption of the technology to a few million users globally. At the core of consumer resistance is the surrender of privacy inherent in allowing the tracking of driving behavior. For the customer, UBI can be a crap-shoot – a 50-50 proposition that participation will actually produce a meaningful discount.
The offered discounts range from 5% just for the initial participation to as much as 40% based on the results of the tracking analysis. But some drivers will not qualify for any discount which can create a quandary in the event of a program using a tracking device that has been permanently installed (as opposed to an easily removed OBDII plug in), or in the case of a dealer or car OEM brokered offer that produces no discount. In the event of the former case the device may have to be uninstalled at a cost to the consumer, and in the latter case the customer may harbor bitterness toward the car maker or dealer.
But the basis for the discounting is specious. The most commonly cited factors are mileage, acceleration and hard braking. Some country and state regulators have banned the use of speed information for rating and we have already noted the restrictions on gender in Europe.
A recent conversation with a BMW executive had me questioning the entire UBI proposition. BMW will never participate in UBI offers, he said, because penalizing drivers for hard braking or acceleration is antithetical to BMW’s vaunted “ultimate driving” experience. If BMW drivers participate in UBI programs and are, therefore, discouraged from hard braking or acceleration by their insurance companies, it undermines many of the pleasurable principals of driving a BMW in the first place.
But this is not just a BMW issue. An executive for a large multinational insurer recently questioned – in a personal conversation – the relevance of “hard braking” as an underwriting criterion. Sometimes hard braking is a life-saving decision or an effective or appropriate reaction to an urgent or dangerous driving situation.
Many drivers have described to me the potentially harmful result of being forced to think twice or three times about accelerating or braking because of the presence of the tracking device on their car. And I have yet to find a driver that is fond of the annoying beeping sound emitted by Progressive Insurance’s SnapShot device during what the device determines to be a hard-braking moment.
My brother was visiting me recently and I told him about the tracking device I had installed in the OBDII port of my car for the purpose of qualifying for a lower insurance rate. His immediate response was: “Why don’t they just use your phone?” With those words my brother captured the very crux of the barrier between a potentially user friendly solution capable of empowering the customer and an annoying and invasive offering fraught with frustration and built to produce disappointment.
The most prevalent UBI offerings around the world require an OBDII plug in that attaches to the diagnostic port available on most, though not all, cars around the world. While the device and the port into which it is to be inserted are relatively simple to understand, the process is not user friendly.
Getting the device to the consumer generally requires the delivery of a product that has been programmed to work with the specific brand, model and year of vehicle to be insured. The hardware may be the same, but the software is not.
The process also assumes that the consumer will be able to locate the OBDII port, also a relatively simple exercise, but not very user friendly given the normal requirement of peering around under the driver’s side of the dashboard. OBDII ports were conceived to enable service technicians to attached diagnostic devices, not for insurance companies to track driving behavior and vehicle performance.
But that is just the hardware side of the proposition. Getting to the delivery and installation of the hardware device assumes that the consumer has accepted the proposition of sharing his or her data with the insurance company and, for that matter, any marketing partners with whom the insurance company may have hooked up.
Actual ownership of the data in most cases appears to lie with the insurance company. And the legal implications of that data ownership are less than clear in the event of an accident. As my disclosure statement states: “You release (the provider of the UBI device and service) and (the insurance company) from any liability associated with the disclosure of information gathered through (the UBI program).”
The problem at the core of the UBI value proposition is twofold: privacy and data portability and ownership. Many consumers have discovered that staying with a single insurer for too long – with a clean driving record and a related low rate – can make switching difficult. The new insurer won’t have access to the claims (or lack of claims) history that has produced such a low rate and will be, therefore, unlikely to match that rate. This is different in the UK where claims history is centrally available. (Lesson #1 – you ought to switch your car insurance occasionally – or often? – to ensure you obtain the best rate.)
Carriers in the UK have been creating apps to enable consumers to get a preview of their potential UBI discount, but these apps do not solve the problem of complete consumer data ownership. The very concept of consumer ownership of driving history data has yet to be seriously presented as a value proposition by either insurers or wireless carriers. Perhaps with data ownership individual consumers could specify which driving attributes they care to share.
Data portability is the proposition that is actually being enabled by UBI programs but it is a concept that few insurers are embracing. In an ideal world, a customer that has gone to the trouble of installing a tracking device on his or her car ought to have ownership of the resulting data and the ability to take that data to another carrier for a competitive quote.
Here, the UK is taking the lead. Just as UK car insurers have led the way in UBI programs intended to defeat rampant fraud, and just as Norwich Union in the UK was one of the first insurance companies to use the Progressive approach to UBI insurance, an emerging insurance industry service provider in the UK, Ingenin, is poised to disrupt the entire insurance industry, not just car insurance.
Perhaps not surprisingly Ingenin’s plan revolves around leveraging the smartphone and all of its sensing capability for determining driving behavior along with a lot of other usage information that may be relevant for other forms of insurance as well. In fact, Ingenin’s proposition not only provides a platform for tracking driving behavior it enables the capture and delivery of information for roadside assistance or crash investigations. And the Ingenin vision also calls for alerting drivers to known hazardous conditions or accident hotzones in real-time via the smartphone.
Even more significant, Ingenin is seeking to leverage voice and facial recognition to tie the insurance to a particular driver not just to the vehicle. Ingenin has yet to announce a major partner. In the meantime, the company is continuing work on bringing its vision to life.
In the end, it may take the use of the driver’s smartphone to deliver a personalized, empowering, and portable insurance proposition capable of transforming UBI insurance into a mass market phenomenon. Consumers are much more comfortable with and accepting of sharing their personal information via their phone – something they are consciously or unconsciously doing every day.
Nothing about current UBI programs is user friendly. In fact, everything from the hardware and software to the disclosure statements and privacy surrender are fairly hostile and opaque. The use of smartphones as in the case of Ingenin can change all that.