Prospects for mileage-based
insurance
SSTI webinar series
March 27, 2013
March 27, 2013
Presented by SSTI
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.
• Executive-level
Community of
Practice
• Technical assistance
• Resource for the
transportation
community
March 27, 2013
SSTI webinar
2
Today’s panelists
Allen Greenberg
FHWA Congestion Management and Pricing
Team
Kelleen Arquette
Towers Watson
March 27 2013
SSTI webinar
3
Can Mileage-Based Insurance Change
Our Driving Habits?
State Smart Transportation Initiative Webinar
Kelleen Arquette
March 27, 2013
© 2013 Towers Watson Global. All rights reserved.
What is UBI?
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5
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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6
Usage-based insurance (UBI)
Customer Feedback
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
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But what is the potential?
Infotainment
Behavioral
Modification
Programs
(teens, mature
market, etc.)
Safety Features
Emergency response,
Roadside assistance,
stolen vehicle
recovery
Concierge Services
Door unlock,
navigation, location
assistance
Vehicle Maintenance
Reporting
Green Driving and
Fuel Management
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8
Customer Installation Experience
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9
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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10
Market Update
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11
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
Inactive
26%
Exploring
14%
Implemented
60%
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
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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
Plymouth Rock
Verified
Mileage
SoCal AAA
American
Family
GMAC
NoCal AAA
Travelers
Safety
Services
State Farm
Esurance
Allstate
Nationwide
The Hartford
Liberty
Mutual
Behavior
Rating
Progressive
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Progressive’s consumer proposition
Source: Progressive website
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Progressive’s Snapshot Discount – 43 states + DC
SM
" 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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17
State Farm In-Drive®
Building a comprehensive product offering with many consumer options

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
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18
Existing smart phone integration
Vehicle Locater
Daily Drive Summary
 Including mileage, time,
stops, trips and MPG
Real-time Vehicle Diagnostics
 Battery status
 Emission status
 Engine trouble codes
Accident Assistance
 Expedited claims handling
 Location and information
documentation
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19
Example of State Farm IPhone application
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Device platform for ‘added value’ customer services
Emergency call

Theft service
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

Detect motion without ignition start-up

Tracking and call for help (in extreme implementations,
disable the car)
Remote safe mode activation

Breakdown service

Ability to trigger a ‘Where am I’ SMS message from the
server, to assist a customer breakdown call
Limited phone capability


Geo-fence service

Detect location outside boundary zone

Trigger notification (in extreme implementations, disable
the car)

Notification of driving exceeding other thresholds (speed,
braking)
To pre-defined numbers for call center support
Satellite navigation
Activates Geo-fence and other driving thresholds via an
SMS message
If linked to a PND screen in car
Driver feedback
Business trip log

Distinguish business travel from personal use

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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21
Shift in product vs. price focus unclear
Progressive
 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
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22
UK: Insure The Box

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 Reward
Miles



Company claims “incentives reduce accidents involving young motorists by 35%-40%”
Source: insurethebox .com
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23
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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24
Telematics in commercial auto

Implementation varies widely dependent on type and size of fleet




Primarily used for fleet management, not insurance
Many telematics manufacturers and distributors; professional installation
typically required



Large, long haul trucking has significant penetration – ~80%
Small, artisan fleets - <10%
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
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
Behavioral
Change
Introduces range of new services


Customers opt (and pay) for services they value
Insurers use these to differentiate product
Effective and
Safe Fleet
Operations
Insurance
Discounts
Value-Added
Services
Protecting the insured and employees


Simple rating based programs


Employer-employee relationships
Enhances overall value of insurer/insured
relationship
Discount-driven, relying on self-selection
Targets high profit customers as they are
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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
Feedback
Measurement



Providing drivers with information
Frequent and timely
Allows drivers to reduce frequency
and severity of risky behaviours
Feedback
Motivation
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% average
reduction in crash rates
Norwich Union – 30% crash
reduction
Safer drivers decrease fuel consumption roughly 10%
29
Proprietary
and Confidential. For Towers Watson and Towers Watson client use only.
Contact information
Kelleen Arquette, FCAS, MAAA
(509) 258-8876
Kelleen.Arquette@towerswatson.com
Towers Watson
www.towerswatson.com
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30
Can Mileage-based Insurance Change
Our Driving Habits?
Allen Greenberg
U.S. Department of Transportation
Federal Highway Administration
Webinar of the
State Smart Transportation Initiative
March 27, 2013
What is PAYDAYS Pricing and
its Relationship to UsageBased 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 Products
Fail 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 partnerships; 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—Lowincome 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.
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
44
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
45
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.
46
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).
47
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.
48
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.
49
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.
50
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)
Allen.Greenberg@dot.gov
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