It is the expectation of the insurance industry as a whole that all policyholders will eventually be subject to participation in some form of usage-based insurance (UBI) program.
Dave Snyder, vice president of the Property Casualty Insurers Association of America (PCI) and the final speaker at the recent Center for Insurance Policy & Research panel discussion in Washington, DC, made that anticipated outcome and projected objective clear. The goal is to bring UBI and all its benefits to all policyholders.
UBI is no longer a theoretical exercise or a concept being tested. UBI is changing and shaping the thinking as regards vehicle connectivity – ie. telematics - overall. Just as all cars will soon have embedded modems, much like smartphones on wheels, auto insurance will ultimately be tied to this technology as well.
In the U.S. alone there are 26 independent UBI programs, according to Robin Harbage, a director at Towers Watson, an actuarial firm serving the insurance industry. Harbage was the first speaker at the recent Center for Insurance Policy Research (CIPR) gathering in Washington, DC, where the merits of UBI programs were discussed and debated by a panel of six industry experts.
Almost as long-lived (16 years) as the venerable OnStar program (17 years) from GM, UBI offerings have found the strongest following in the U.S. thanks to Progressive’s aggressive implementation and promotion of SnapShot.. Originally known as Autograph when it was piloted, SnapShot is now widely advertised on television in the U.S.
Harbage says nine of the top 10 insurers, representing 75% of the market, in the U.S. now have programs, with 49 states having four or more available programs and Ohio with more than 10. While UBI programs are ramping relatively rapidly in countries such as Italy (where the eponymous Monti Decree obliged auto insurers to make discounted “black box” UBI programs available to all customers on demand), the United Kingdom (to combat insurance fraud), and South Africa (to reduce theft), the U.S. has forged a leadership position based on Progressive’s low cost approach.
For the insurance industry UBI is all about cost. UBI is all about using vehicle tracking data to create better underwriting algorithms to reduce so-called “loss costs.” Loss costs, in the words of the industry’s standards-setting body ISO, “are accurate projections of average future claim costs and loss-adjustment expenses – overall and by coverage, class, territory and other categories.”
For the insurance industry, UBI solutions represent the next paradigm shift in underwriting. The insurance industry is the only industry that sells a product for which the cost is unknown or, at best, estimated. The last great shift in the industry came when credit scores came into use as an enhancement to the loss cost estimating process.
Of course, UBI introduces all the same concerns implicated in the use of credit reports including harm to protected classes such as race, gender and income. The panel discussing the issue at CIPR included Harbage along with Allen Greenberg of the US Department of Transportation, James Bielak of standards-setter ACORD, Sandra Castagna of the Maryland Insurance Administration, Birny Birnbaum of the Center for Economic Justice, and Snyder of PCI.
UBI also introduces privacy concerns and the potential for vehicle hacking, dependent, as the dominant programs are, on the use of devices that plug into a vehicle’s OBDII port. (The panel did not spend much time debating the merits of permanently installed vs. smartphone vs. cigarette lighter-based vs. OBDII devices or combinations thereof – or even the use of data from embedded systems such as OnStar.)
First and foremost, UBI is important because it is forcing the insurance industry, which has the most immediate and significant financial interest in vehicle connectivity, to sort out the legal issues. The discussion at CISP focused on privacy, data ownership and data use – the three foundational issues upon which the telematics industry is being built.
These foundational principles were highlighted by Harbage who noted that any UBI program must explain three issues to participating policyholders:
What data will be collected?
What will be done with the data?
What organization(s) will have access to the data?
There are many additional questions implicated in those three – but they represent the core of the value proposition. Harbage went on to describe what is often perceived and presented as the win-win-win proposition of UBI programs for consumers, regulators and insurers.
Consumers are seen gaining control of their premium along with more transparency and even driving behavior feedback. Consumers also presumably appreciate green driving dividends from participating in the programs, according to Harbage, along with value added services, which can range from roadside assistance to geo-fencing, among a wide range of other applications.
Regulators and government representatives point to the fact that UBI program participants tend to drive less and in a safer manner, reducing accidents, congestion and emissions. The use of actual driving data is also seen as a “fairer” means of discriminating risk.
For insurers, UBI programs offer the opportunity to steal the best risks from competitors in a highly competitive and mature market, while also reducing churn – the tendency of customers to shop for better rates and switch their coverage. The data also has allowed actuaries to understand that certain “miles driven” are 1000’s of times more risky than others, in the words of Harbage.
UBI programs have also given insurers something new to talk about with existing and prospective customers – rejuvenating the market and stimulating both competition and customer interest. These two elements, though, have been undermined by the so-far ambivalent approach of most insurers to offering UBI programs to existing customers. Most insurance brokers in the U.S. discourage existing policy holders from participating in UBI programs – though that may be changing.
The insurance industry’s lingering ambivalence is rooted in a number of factors including the lag inherent in obtaining regulatory approvals, the limitations on the use of vehicle data, the lack of understanding of vehicle data, and the perception of UBI as a discount-only offering. Layered onto the privacy and discrimination concerns along with the cost of creating the necessary hardware, software and personnel infrastructure and it is easy to see the sources of the industry/s delayed embrace of UBI.
Still, the benefits to insurers far outweigh these concerns. In addition to the societal positives outlined by Harbage and by Greenberg of the US DOT, UBI programs also lead to substantial reductions in claims, both in amount and severity. Greenberg estimated that claims reduction at 8% beyond what would normally be anticipated.
Greenberg further noted the connection between UBI programs and the pilot programs (in Oregon and elsewhere) currently testing road use taxing to compensate for declining fuel tax revenues fed in part by the onset of electric vehicles. Both UBI and usage-based taxes (VMT) are likely to require a module connected to the vehicle. In a similar vein, Bielak of ACORD noted the forensic potential of UBI devices for determining liability, an application already widely used in Europe.
So the value proposition for insurers seems unmitigatedly positive. UBI gives insurers a powerful tool to steal low-risk customers from competitors, reduce churn, reduce claims and loss cost, and potentially obtain forensic information from crash scenes while enabling value-added service opportunities.
But associate commissioner Castagna from the Maryland Insurance Commissioners office helped CIPR attendees better understand the obstacles to progress by highlighting the wide range of questions regulators still have with UBI programs including:
How frequently will data be transmitted from the telematics device when the vehicle is in motion?
How long must the device stay in the vehicle to obtain a “valid sample” of driving behavior data?
Where is all data stored, for how long and who has access?
What combination of the data results in a discount?
Castagna had further questions regarding the determination of the discount, disclosures, data usage (law enforcement, claims investigation, marketing, sales), the use of geographic zones based on traffic or business density, notification of discount changes due to driving behavior, and explanation of changes in discounts. From her statements it was clear that these were not settled matters.
Castagna stated that one of the Maryland commission’s concerns is to try to determine if “increased market penetration of telematics insurance and PAYD programs positively impact low-income households.”
Birnbaum of the Center for Economic Justice (CEJ) shared Castagna’s concern that UBI programs be made accessible to low-income consumers. The worry is that low-income consumers will subsidize participants in UBI programs while not having access to the same discounts.
CEJ favors the use of mileage-based insurance programs over the prevailing “driver behavior” offerings being widely adopted in the U.S. and elsewhere. Birnbaum highlighted his concerns as follows:
Privacy issues and use and distribution of data by insurers for purposes other than loss mitigation and pricing, including, for example, insurers using information from telematics in claim settlements when helpful to insurers but not making the data available to consumers when helpful to consumers;
Disproportionate impact of offer and sale of UBI against consumers in low- and moderate income and minority communities;
Failure to achieve meaningful loss mitigation because of black box approach by insurers of collecting data for rating;
Use of telematics data as merely another data mining exercise following on insurer use of credit information – including penalizing consumers not because of driving behavior but because of where and when they drive as a function of work and housing segregation;
Limited regulatory oversight to date.
Birnbaum says CEJ wants the National Association of Insurance Commissioners (NAIC) to:
Establish data ownership and privacy standards.
Establish standards for permitted and prohibited uses of consumer data.
Collect and analyze granular data on offers and sales of UBI based related to prohibited risk classification factors, including race and income; Require insurers to include variables for race and income in generalized linear models.
Establish standards for disclosure of telematics results and rating programs to ensure consumers receive feedback necessary to alter behavior.
Replicate analyses presented by insurers in summary form – require insurers to produce all analyses – not just loss ratio as outcome variable, but other analyses using other outcome variables.
And as a final comment, Birnbaum said, “Stop this fiction of discounts-only unless and until the rating factor can be associated with lower overall claims and not simply a redistribution of income.”
The bottom line for Birnbaum is the same as for Harbage – insurers must disclose what data is being gathered and how it is being used. Additionally, rules of data ownership and protection must also be set and implemented before UBI will be embraced by consumers.
These questions and concerns are the very same concerns confronting auto makers like GM which have been gathering data for years with little or no oversight or regulation. The task rests with the insurance industry to lay the groundwork for UBI which may well contribute to or, in fact, determine the success of telematics more broadly.
Snyder’s vision of the comprehensive implementation of UBI technology cannot be exaggerated. As UBI adoption in the U.S. progresses, still estimated at fewer than 2M policies, the adverse selection pressure will grow on insurers as-yet not offering UBI services. Insurers who fail to explore UBI offerings will not only find themselves providing insurance to customers with the worst risk profiles, they will also miss out on the value-added service opportunities presented by UBI.