Prospects for mileage-based insurance
SSTI webinar series March 27, 2013
Presented by SSTIMarch 27, 2013
• Executive-level Community of Practice
• Technical assistance• Resource for the
transportation community
SSTI webinar 2
State Smart Transportation Initiative
Practical Solutions to Move America Forward. A network of reform-oriented state DOTs, founded in 2010 and housed at the University of Wisconsin.
March 27, 2013
SSTI webinar 3
Today’s panelists
March 27 2013
Allen Greenberg
FHWA Congestion Management and Pricing Team
Kelleen Arquette
Towers Watson
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Can Mileage-Based Insurance Change Our Driving Habits?State Smart Transportation Initiative Webinar
Kelleen Arquette
March 27, 2013
What is UBI?
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© 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com
Usage-based auto insurance
What it is
A device collects real-time driving data Date and time, trip duration, speed, turning forces, and even location (optional) Additional data can be merged including weather, traffic, and more
Data is sent to the insurance company who uses it to rate the driver on actual driving behaviors
What it offers insurers
Enhanced risk segmentation & improved pricing accuracy
Reduced loss costs & reduction in claims
Increased consumer retention & satisfaction
Product differentiation & brand awareness
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Usage-based insurance (UBI)
Insurance Premium
$1,200
$1,080
$1,000
$ 900
Insurance Premium
$1,200
$1,080
$1,000
$ 900
Company Feedback
Vehicle Score
VIN: 12345…
Miles driven: 6,234
Event 1 per mile: .05
Event 2 per mile: .01
Customer Feedback
Insurance Premium
$1,200
$1,080
$1,000
$ 900
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But what is the potential?
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Safety FeaturesEmergency response, Roadside assistance,
stolen vehicle recovery
Vehicle Maintenance Reporting
Green Driving and Fuel Management
Behavioral ModificationPrograms
(teens, mature market, etc.)Infotainment
Concierge Services Door unlock,
navigation, location assistance
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Customer Installation Experience
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Telematics data is predictive
Various studies demonstrate predictive potential
Companies gain competitive advantage through better segmentation
Elimination of cross-subsidization is more “fair”
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Rural Urban
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2003-07 Vermont Crash Rates
Highway
Major Arterial
Minor Arterial
Collector
Local
Market Update
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Widespread presence of personal lines programs in US
Forty-six states have 4+ personal auto UBI programs implemented
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Top 50 U.S. private passenger auto companies
At least eight top 10 personal auto insurers have implemented programs to insureds in at least one state
U.S. companies representing nearly 75% of the market already have programs or are actively pursuing them
“UBI device sales rocketing from $50 million in 2011 to approximately $2.6 billion by 2015.” — FC Business Intelligence
Implemented60%Exploring
14%
Inactive26%
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Telematics in personal auto
Several UBI business models exist
Many other companies, including small companies, are moving toward implementation
Companies of all sizes and geographic distribution
Verified Mileage
Safety Services
BehaviorRating
Plymouth Rock
SoCal AAA
Esurance
Nationwide
NoCal AAA
GMAC
Travelers
AmericanFamily
The HartfordLibertyMutual
Allstate
State Farm
Progressive
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Progressive’s consumer proposition
Source: Progressive website
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Progressive’s Snapshot DiscountSM – 43 states + DC
" Nearly half a million drivers have participated countrywide to get personalized car insurance rates by sharing a picture of how they drive.”
— Richard Hutchinson, UBI general manager
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Progressive’s program
Optional program with customer selecting which vehicles to enroll
Wireless device plugged into OBD II port records time, speed and harsh braking
Discount calculated based on first 30 days, then applied for remainder of term
Device removed after first term and discount is fixed until significant endorsement
Maximum discount of 30% and no surcharge in most states
Approved in 43 states and Washington, D.C.
Consumers can try before buying
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State Farm In-Drive®
Existing Drive Safe & Save Program with OnStar in fourteen states
In-Drive® for IL and Utah
Now includes Ford Sync in Utah
Discount up to 50% based on mileage, turns, acceleration, braking, speed and time of day; 40% for mileage only
Free 6-month introductory period, and $6.99 to $11.99/month standard pricing depending on additional features Emergency response Stolen vehicle location assistance Vehicle diagnostic alerts and maintenance reminders Speed alerts Website and smartphone app for remote and mobile access
Building a comprehensive product offering with many consumer options
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Existing smart phone integration
Vehicle LocaterVehicle Locater
Daily Drive Summary Including mileage, time,
stops, trips and MPG
Daily Drive Summary Including mileage, time,
stops, trips and MPG
Real-time Vehicle Diagnostics Battery status Emission status Engine trouble codes
Real-time Vehicle Diagnostics Battery status Emission status Engine trouble codes
Accident Assistance Expedited claims handling Location and information
documentation
Accident Assistance Expedited claims handling Location and information
documentation
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Example of State Farm IPhone application
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Device platform for ‘added value’ customer services
Emergency call Use 3D-Accelerometer and OBD speed to detect
significant impacts Use cellular connection to post an SMS with details Require a back-end real-time service to pick up the event
and dispatch help
Breakdown service Ability to trigger a ‘Where am I’ SMS message from the
server, to assist a customer breakdown call
Limited phone capability To pre-defined numbers for call center support
Satellite navigation If linked to a PND screen in car
Business trip log Distinguish business travel from personal use
Theft service Detect motion without ignition start-up Tracking and call for help (in extreme implementations,
disable the car)
Remote safe mode activation Activates Geo-fence and other driving thresholds via an
SMS message
Geo-fence service Detect location outside boundary zone Trigger notification (in extreme implementations, disable
the car) Notification of driving exceeding other thresholds (speed,
braking)
Driver feedback Real-time buzzer in car facility Reports and mapping in customer portal website
Subscription services could enhance claims management, address fraud,subsidize cost of launch and generate revenue
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Will price remain king with more powerful risk segmentation?
Price focus will require strong analytic insight with more data to create new risk factors from telematics data
· Opportunity to de-commoditize the product· Product/service focus including driver coaching
require an understanding of driving behavior and the key influencing factors
FEATURE FOCUS
P
RICE PROPOSITION
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Shift in product vs. price focus unclearProgressive
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UK: Insure The Box
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Young driver and low mileage driver proposition
Pre-paid insured mileage and a retail voucher scheme. Bonus miles can be earned with good driving
Insure The Box has fitted 85,000 devices since June 2010, 6,000 new customers per month
Online portal allows customer: To view how many miles they have
used and how many remain To view their bonus miles
To top up their mileage
To make changes to their insurance, such as change of address
To visit ‘ShoppingBox’ to purchase items online and earn RewardMiles
Company claims “incentives reduce accidents involving young motorists by 35%-40%”
Source: insurethebox .com
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Canada: Industrial Alliance “Mobiliz” Program
Aimed at improving driving behavior for youthful drivers (age 16 to 24)
Web portal for drivers to view data
Weekly activity report sent to drivers
Web-based operations – quote, purchase, payment, claims
Hard-installed device
Monitors distance, speed, acceleration and hard braking
Premium varies monthly
Discounts up to 25%
Claims history does not impact premium
Available in Quebec
Source: CNW Newswire, April 12.
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Telematics in commercial auto
Implementation varies widely dependent on type and size of fleet Large, long haul trucking has significant penetration – ~80% Small, artisan fleets - <10%
Primarily used for fleet management, not insurance Many telematics manufacturers and distributors; professional installation
typically required Annual maintenance provides opportunity High average premium justifies cost
Commercial auto insurers are moving quickly to catch up with personal auto insurers At least four top 10 commercial auto insurers have
implemented programs with others in exploration phase
A third of the top 50 insurers are exploring or implementing programs; the size of the segment is increasing quickly
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The Future of UBI
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The Customer Evolution of value beyond discounts
Behavioral Change
Effective and Safe Fleet Operations
Value-AddedServicesInsurance
Discounts
Simple rating based programs Discount-driven, relying on self-selection Targets high profit customers as they are
Introduces range of new services Customers opt (and pay) for services they value Insurers use these to differentiate product
Protecting the insured and employees Employer-employee relationships Enhances overall value of insurer/insured
relationship
Influence drivers to improve driving behavior Potential to save lives and significantly impact driving
safety Dynamic and Flexible – creates long term customer
“stickiness” Potential to significantly impact insurer profitability
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Changing Driver Behaviour – Keys to Successful Program
Measurement Measuring and interpreting driver
behaviours and decision making Based on accessible telematics
data with other relevant data to put behaviours in context Measurement
Feedback
Motivation
Feedback Providing drivers with information Frequent and timely Allows drivers to reduce frequency
and severity of risky behaviours
Motivation Creating an environment within which a driver is motivated to
change behaviour Best practice tends to focus on positive reinforcement
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Evidence of improved driving
Iron Mountain: 93% reduction in fleet crash rate
Iceland postal service reduced crash rate by 56%
Pepsi (Iceland) reduced fleet crash rates by over 80%
GreenRoad: 54% improvement in fleet crash rate
DriveCam: 50% averagereduction in crash rates
Norwich Union – 30% crash reduction
Safer drivers decrease fuel consumption roughly 10%
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Contact information
Kelleen Arquette, FCAS, MAAA
(509) 258-8876
Towers Watson
www.towerswatson.com
Can Mileage-based Insurance Change Our Driving Habits?
Allen GreenbergU.S. Department of TransportationFederal Highway Administration
Webinar of theState Smart Transportation Initiative
March 27, 2013
What is PAYDAYS Pricing and its Relationship to Usage-Based
Insurance (UBI)?
Pay-as-you-drive-and-you-save (PAYDAYS) pricing converts hidden and lump-sum costs of auto ownership and usage to transparent, variable costs.
Such costs may relate to insurance, but also to parking, vehicle taxes and fees, or to the car itself through car sharing.
Why PAYDAYS Pricing?
Most of the costs of owning and operating a vehicle are fixed.
The financial incentive not to use personal vehicles heavily is relatively small.
Many households, especially low-income ones, would prefer variable costs to fixed ones.
Various studies project substantial driving reductions, public policy benefits, and consumer savings resulting from PAYDAYS pricing.
UBI Is Not a New Concept(But Tools to Offer It Are New)
As early as 1929, virtues of charging for car insurance by the mile were recognized.
Concept promoted by Nobel economist William Vickery in his 1968 work: “Automobile Accidents, Tort Law, Externalities and Insurance.”
Results of UBI
Cuts vehicle miles traveled Curtails crash claims in excess of driving reductions Relieves congestion at a rate greatly exceeding driving
reductions Diminishes air pollution and carbon emissions Lowers infrastructure costs Strengthens cities and lessens urban sprawl Provides substantial consumer savings Increases insurance company profits
Features of UBI To Maximize Driving Reductions (An Objective of Some
Federal Grant Funding)
Direct and transparent per-mile or per-minute-of-driving pricing—avoid rebates
In-vehicle graphic displays of “insurance pricing meter” with e-mail and Web summaries
Frequent billing without automatic bill payment Transit pass discounts for UBI customers or bundling
transit passes with a few free miles of insurance Individualized assistance to identify alternatives Peer comparisons and “regret lotteries” to encourage
continuous mileage reductions
Research Provides Actuarial Justification for UBI Pricing
Research from Massachusetts that combines vehicle mileage and loss cost data shows a compelling relationship (R2 rises 0.15 to 0.72).
Host of mostly small instrumented vehicle studies consistently shows a strong linkage between certain driving habits and crashes.
Actions of insurance companies also suggest actuarial underpinnings for UBI.
Instrumented Vehicle Studies Support UBI Pricing
“100-Car Naturalistic Study” in No. VA found that the 12.5% most dangerous drivers had over 100X the crash risk of the 12.5% safest drivers.
An Israeli 103-vehicle monitoring study found that aggressive drivers were responsible for 16.6X the crash costs of the safest drivers.
A 95-driver test of incentives to reduce speeding in Sweden led to a decline in speeding frequency from 15% to 8% of driving time.
Typical Company Approach to Introduce UBI Pricing—Premium
Discounts for Data
Willing participants are likely lower risk
Gets data that companies need to offer an attractive UBI product
Pricing power comes with data control
No Long-term Solution
Customers will ultimately gain control of their data and use it to get competitive price quotes, as they do today for non-UBI policies.
Why? Because customers have smart phones and their vehicles have OEM-installed telematics, the data will be theirs to share.
A “green brand” comes from an external credible source (e.g., CERES/NRDC/EDF PAYD Insurance Product Rating System; State Climate Action Plan UBI goals tied to driving reductions).
Evolutionary UBI ProductsFail with Revolutionary Demographic Changes
Changes noted in Zogby’s “The Way We’ll Be,” CCC Info Services “Crash Course 2012,” etc.:
– Young people delay licensure (75% of 19 year olds in 2008 v. 87% in 1983 in the U.S.), own fewer cars, live in cities, and take transit
– “Automobility” increasingly met through car sharing (beginning on college campuses) and “dynamic ridesharing”
Insurance Industry Failings
Auto companies respond with car sharing partner-ships; insurance companies are unresponsive.
Instead of looking at peer-to-peer carsharing as a business opportunity, insurance companies threaten or hide (NY Times, 3/17/12).
Consumer Federation of America Report—Low-income households forced to pay high insurance rates.
Insurance Company and Regulator Flexibility Needed
Be a leader and problem solver, not the problem.
Don’t over-price new risks; find constructive approaches to reduce exposure and price.
Adopt to new markets—car owners want to rent their cars to their neighbors and some renters will become owners; build business relations now.
Take heed of behavioral economics and U.S. Federal pilots.
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Federally-funded Pilots (“Insurance-led” Projects)
King County, WA with Unigard Insurance (company pulled out; substitute to be named)
Texas DOT with MileMeter Insurance and NuRide (insurer exited; substitute to be named)
MassDOT with Plymouth Rock Assurance Corp. and Conservation Law Foundation Ventures
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Federally-funded Pilots (Insurance “Add-on” Projects)
Portland, OR peer-to-peer carsharing with Getaround is supposed to include UBI for renters and owners
DriveSmart NYC, a test program to move toward mileage-based user fees (in response to declining fuel tax revenues), will include UBI
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Comparing Federally-funded Pilots with Other UBI Products
Only Federal pilots include control conditions to enable before-after comparisons.
Smaller companies won funding for their pilots in part by demonstrating greater flexibility than larger companies, but launches sometimes failed.
Federal pilots have required premiums to vary a minimum of 70% based on mileage, which is larger than for other products in the marketplace.
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Comparing Federally-funded Pilots with Other UBI Products
(cont.)
Federal pilots require the mileage and pricing relationship to be transparent to the customer, which is not consistently so with other products.
Federal pilots generally test more than one pricing protocol (e.g., rebates v. direct bill in Massachusetts), while other products do not.
Federal pilots are unique in also testing add-on incentives (e.g., transit passes in Washington State and NuRide incentives in Texas).
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Company Challenges in Participating in
Federally-funded Pilots
Good pilot design to measure driving changes takes work and requires creativity with customer interface and public relations.
Must interact closely with a research design team, typically from a university.
Internal company support and some flexibility are required throughout the entire pilot period.
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Company Benefits from Participating in U.S. Federally-
funded Pilots
Reliable funding (despite occasional contracting and billing complexities), but unreliable timing.
Potential for very good on-the-ground product and implementation advice from top-notch researchers and behavioral economists (advisory panel).
Credible, independently verified research results on environmental, safety, and consumer equity effects lead to consumer and regulator enthusiasm.
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Federal Government Actions to Watch
UBI Request for Information (RFI) to further actuarial knowledge closed on 1/14/13. Request for Proposals to follow ($300k suggested by RFI).
New insurance company partners needed for projects that are already Federally-funded ($1-$2 million).
2,500-vehicle Naturalistic Driving Study is underway.
Government transportation funding shortfalls lead to tests of mileage-based road user fees; could, as NYC is doing, combine with UBI tests.
Thank you!
Allen Greenberg
U.S. Department of Transportation Federal Highway Administration Congestion Management and Pricing Team 1200 New Jersey Ave., SE HOTM-1, Mail Stop E-84-402 Washington, DC 20590 (202) 366-2425 (ph)
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March 27 2013
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