Auto insurers are desperately seeking a technology edge, which is why so much attention has been focused on usage-based insurance. Seen by many as a paradigm-shifting silver bullet for insurance underwriting, usage-based insurance has become the conventional wisdom industry mantra for the next big thing.
The only problem with this next big thing in car insurance is that it continues to experience a failure to launch even as pilot programs multiply around the world and existing programs continue to add thousands of users. The key problem facing the industry is that the ranks of new subscribers are coming on board in the thousands, not the hundreds of thousands and certainly not in the millions.
The latest event held to confront this conundrum was Insurance Telematics Europe, held in London just last week. All of the attendees and presenters agreed that there is a huge opportunity in connecting to customers to deliver insurance programs based on vehicle usage, but it seems that no one could agree on the means to achieving a mass market.
One salient point did emerge, however, and that is that consumers seeking the least expensive insurance programs are more likely to find the very cheapest rate in a conventional program than from a usage-based program. This means that consumers are still subsidizing the cost of connectivity for insurance without a demonstrable value proposition.
Nowhere in the world is this issue more pronounced than in the U.K. where 10 auto insurance comparison sites and more than 130 auto insurances compete for the attention of the driving public. And on all those Websites – Confused.com, TescoCompare, MoneySupermarket, ComparetheMarket, GoCompare, USwitch, etc. – the lowest quotes are for conventional insurance offers.
The most recent entrant in the insurance comparison site game in the U.K. is Google (www.google.co.uk/compare/carinsurance) which is planning a Q4 launch in the U.S. Google will join Walmart which just launched an insurance comparison shopping offer in cooperation with AutoInsurance.com.
In addition to car insurance comparison shopping sites, insurers continue to seek alternative sources of data suitable for underwriting:
Cannot consider income, race or religion
May consider occupation, education - but consumer advocates are concerned that these not become “surrogates” prejudicial to protected classes of consumers
Research shows consumers with less education, lower paying jobs getting quoted higher rates
Permissible: zip code, age, driving record, mileage, car make and model, marital status, gender (not in Europe!)
Voting records? – a correlation to more or less claim filing exists
Price optimization based on shopping patterns
This last proposition – price optimization based on shopping patterns – may be a key justification for Google’s interest in the market. Google is also no doubt interested in capturing as much of the insurance shopping traffic as possible leveraging its role as an impartial service provider.
Many of the comparison sites in the U.K. are owned or co-owned by insurers directly. So Google separates itself with superior or more transparent privacy protection and advanced analytics intended to better refine the process of quoting insurance which, in the U.K., is a delicate process of in a highly competitive market.
Meanwhile, at the Insurance Telematics event, attendees agreed, based on on-site surveys as well as survey data presented, that consumers of car insurance are looking for a 50-100£ discount before jumping to a UBI offer (for consumers other than young drivers paying thousands of £’s). This is the single greatest barrier to acceptance in the broader market. But speakers at the event chose not to address this.
Most of the speakers at the event focused overwhelmingly on the value of usage-based insurance to the insurance companies. Insurers using so-called “black box” insurance have an advantage in obtaining first notice of loss (FNOL), collecting forensic information on the driver and vehicle performance, and more closely and accurately evaluating driver behavior.
Insurers using black box insurance programs are also in a privileged position for selling value-added services (automatic crash notification, roadside assistance, stolen vehicle tracking and recovery), “stealing” customers from competitors and retaining customers – ie. reducing churn. Insurers already using black box insurance programs believe that adverse selection (ie. the movement of the best drivers with the lowest risk into UBI offerings) will eventually drive the entire market toward connected solutions.
But if consumers have to pay more for connected UBI programs, they are not likely to perceive paying a lower premium as adverse selection. The further challenge to broad acceptance of UBI programs are significant regional differences around the world.
In many European countries, most notably Germany and the U.K., annual premiums are well below $1,000 with exceptions only for younger drivers. The best markets for UBI programs are the U.S., Italy and South Africa or any market where annual rates have hit onerous levels - >$1,000/year.
But even in Italy some of the leading insurers are charging a premium for UBI program participation, rather than offering a discount. There is an irony, here, in that the Monti Decree passed more than two years ago and regulating car insurance was intended to ensure that all car insurers offered a black box usage-based program that was no more expensive than a non-UBI program with the same coverage.
But insurers in Italy, such as Generali, are offering UBI programs as a value-added service. As a result the UBI offer in Italy, as elsewhere, is not the cheapest offer on the block.
This has to change. For UBI to achieve acceptable levels of adoption and scale it must become the cheapest offer in the kit and available to all. The value to the insurer, as noted earlier, is well beyond the perceived or justifiable value to the consumer. Even in the U.S.where car insurance is expensive, UBI programs are mainly offered to new customers while existing customers are told they already have the best rate. UBI is usually only offered to existing customers when they threaten to change carriers.
Progressive Insurance is probably the only company embracing UBI in a brand defining manner with its SnapShot offer in the U.S. Elsewhere in the world, usage-based insurance offerings are capturing much less interest.
But even Progressive has not embraced UBI as an offering for MOST of its customers and the promotion has been inconsistent, with the company trying a range of different messages with varying results. In addition, Progressive has taken the extreme low cost approach to UBI, eschewing the value-added elements of being connected to customers by having SnapShot users send the OBDII module back to Progressive after six months.
The other market leader, Octo Telematics, has also taken a hardware approach, which it has modified and segmented for different audiences since its original launch nearly 10 years go. But even Octo is seeing only tens of thousands of new users every month, not enough to achieve mass market participation.
The time has arrived for an existing market participant or new entrant to move its entire business model over to connected, UBI insurance. An opportunity exists for a supplier to shift to an OBDII-for-all approach, slicing through the segmented and fragmented insurance offerings for a monolithic program based entirely on connectivity.
The key to the success of such an offer will be the creation of a community of users connected via portal and mobile app where traffic and weather information can be shared and driving ability can be competitively evaluated. The company offering such a program might also offer vehicle repair and new car shopping services as well as comprehensive service history and cost of vehicle ownership insights.
Essential to the success of such a program will be the OBDII device which will have to be given away or subsidized as well as professionally installed – although DIY installation may be allowed. The objective of such an offering will be to offer value added services on top of the insurance discount and skim off all insurance customers will to opt into an information sharing based value proposition.
This NewBI program offering will be designed to match any non-connected comparable insurance offer with the idea in mind that the value of the data gleaned from and shared with participants will generate additional added value for auto and non-auto-related insurance and non-insurance products and services. More than one research organization has forecast a market of more than 100M UBI subscribers within three years. This is the only feasible roadmap to achieving that level of adoption.
Have incremental gains occurred? Yes. Volvo and Renault announced plans for UBI offers making use of on-board, built-in connectivity. New black box solutions were also on offer from Cambridge Consultants and DrivenLower while smartphone-based offerings were discussed including MyDrive and DriveFactor among many others.
But more bolder steps are necessary to move the market. In the end, the battle is over control of the customer and if insurers fail to capitalize on this market window of opportunity, car makers will slam the window shut and seek to take direct control of the UBI proposition via the embedded modem.