Usage Based Insurance – What Systems Implications does a Carrier Face When Implementing a Program?

usage based insuranceUsage Based Insurance (UBI) (a.k.a. Telematics) is gaining traction in the U.S. Market.   At least 18 states have four or more Personal Auto programs implemented, and 49 states have at least 1 program.

As mid-sized and smaller carriers venture into this space, they need to consider the system implications that accompany a program implementation. While the specifics will vary depending on the type of program implemented, there are several areas that will be impacted.

First, Policy Quoting and Issuance: Assuming that the carrier utilizes some type of on-line portal to support the quoting process, the carrier must update the portal to accommodate enrollment into the UBI program on a per vehicle basis. Rules may be needed to limit those who are eligible for the program or to encourage certain individuals to join the program. If introductory premium discounts will be given just for joining the program, these discounts must be accommodated within the new-business rating algorithms. Additional data may need to be gathered about individuals joining a UBI program, such as email address, a field not commonly maintained in legacy systems. If the carrier makes rating available through a comparative rater, the carrier will need to decide if and how the comparative rating site will reflect the UBI program. Policy Declarations will also require alterations to reflect the new program. Finally, upon issuance of the policy, a new workflow will need to be triggered in order to issue a UBI device and installation instructions to the insured.

Second, Administration Systems: Once the policy is issued, various back-end systems and processes need to be altered to accommodate the UBI program as well. Policy Administration and Renewal Processes will need to incorporate the data gained from the UBI device, typically in the form of a driving score. Billing System changes may be needed if the carrier decides to charge drivers for lost or damaged UBI devices. Customer Service systems need to be updated so that service representatives know which customers are participating in the UBI program and can answer their questions related to the devices and driving discounts. The carrier may consider special telephone routing so that UBI program participants are handled by specialized customer service representatives. Claim System changes may also be needed if the carrier wants to ensure that Claims Adjusters are made aware that a vehicle is part of a UBI program.  For carriers who rely on independent agents, Agency Download should also be updated to reflect the new program. Finally, back-end data warehouse and management reporting systems will need to incorporate UBI related data and develop new analyses to support the program.

Third, Workflow and System Capabilities: First, the carrier must manage an inventory of UBI devices, tracking which have been issued and associating issued devices to specific vehicles. The carrier must also develop a number of communication protocols in partnership with their Telecommunications Services Provider. For example, if an issued UBI device stops communicating, the carrier will need to communicate with the insured. The timing and format of these communications requires some forethought. If a UBI device goes silent for a day or two, it could mean that the vehicle is temporarily out of range, perhaps in a remote vacation spot, or the device was removed while the vehicle is in the shop. On the other hand, the device could have been unplugged for routine service and accidentally left unplugged. If the carrier reacts too quickly, they could easily annoy the insured and appear like “Big Brother”; if they wait too long to react, they could lose valuable data. Changes are also needed to accommodate drivers who want to add, remove, or change vehicles within the UBI program during a policy period; this may require a separate management system altogether and could impact the scoring algorithms created. Thus, establishing the right communication protocols is critical to the program’s success.

Similarly, the carrier needs to determine how they will receive and model the driving data collected by the UBI device.  Will they gather the detailed data, transform it into meaningful information, and develop predictive models based on that data that can be applied within renewal rating algorithms. Or will they partner with an expert who can manage data collection and manipulation for them, providing them with some type of a score to apply within their rating algorithms. In either case, the carrier needs to understand the data that they will be receiving and establish systems for managing and utilizing that data.

Finally, the carrier must establish a means to provide feedback to the drivers participating in the program. Typically this is accomplished via a web-site where the driver can view his/her driving history, compare that history to some type of benchmark, and view tips to improve driving behaviors.  Again, the carrier may be able to partner with the Telecommunications Services Provider to deploy this functionality, but the carrier must work with the provider to define what data will be presented, and the carrier must be prepared to answer questions that their insureds will have about the data presented.

In closing, successfully implementing a UBI program has ripple effects across a wide swath of an insurance carrier’s infrastructure.  Before embarking on this journey, a carrier must give thought to both the initial launch and ongoing support of the program, making decisions about how to best integrate the program into its underlying systems and processes. Strong partners, both those with specific UBI expertise and those with more generic system, process, and project management expertise, can ease implementation and speed time to market.

Usage Based Insurance – What Value Can Carriers Offer Customers Beyond A Premium Discount?

usage based insuranceWithin the U.S. market, Usage Based Insurance (UBI) (a.k.a. Telematics) is primarily marketed as a means of lowering premium.  As discussed in a previous post on Usage Based Insurance, a driver allows the insurer to monitor his/her driving behavior, and in exchange for safe driving habits, the driver receives a discounted premium.   But these programs also offer an opportunity for a carrier to provide value-added services to their customers, an opportunity to craft a product rather than to offer the lowest price on what is often seen as a commodity.  Depending on the device chosen and the data collected, a wealth of services can be offered that allow for additional touch points between the carrier and the insured, beyond bill paying and claims settlement.

For example, safety related services could form the foundation for an offering.  The UBI device could be used to monitor, and proactively report to the driver, information about needed car maintenance items.  It could also be used to offer road-side and accident assistance, to remotely unlock a vehicle, or to locate a lost or stolen vehicle.   For a driver who is searching for his/her car in a large, dark parking lot, this last ability could be both a major convenience and a huge safety feature.

Teen or Elderly driver monitoring services could be the basis of another offering. For example, the UBI device could send text messages when a vehicle arrived, as expected, at a certain destination (e.g. when a student arrived home from school each day).  Similarly, the device could issue an alert when driven outside certain preset geographic boundaries, speed limits, or curfews (e.g. when an elderly driver operated the vehicle at rush hour). The device could also be used to provide mapping, showing where a vehicle was driven or locating a vehicle/family member at any given time.

Innovative gaming techniques and feedback mechanisms could be used to provide driver guidance. These tools would allow each driver in the household to profile and compare his/her habits to others in the household and to the “average” driver. The integration of gaming into current feedback loops would better engage drivers. By comparing driving profiles over time and by competing to improve their profiles, drivers would also improve their driving habits.

While many of these services are available through various venues, a carrier can use a telematics offering to craft a product that provides both value and service to its customers. It can attract and retain customers by providing a unique blend of tools that provide benefit on a daily basis rather than a basic promise of service when an accident occurs. By carefully considering its target market and by focusing on services of benefit to that market, a carrier can differentiate itself within an increasingly commoditized field. As UBI programs permeate the market, smart carriers will leverage their capabilities for far more than another way to compete on price.

Usage Based Insurance – Who are carriers’ target audience and who will be left?

usage based insuranceUnless you live totally off the grid, you have seen a commercial for Progressive’s Snapshot program.   Progressive and other major carriers are offering and forcefully marketing usage based insurance (UBI) to their customers.   The idea behind usage based insurance (a.k.a. Telematics) is that the insured’s premium is based on his/her actual driving behavior as captured by a device that is plugged into the vehicle and transmits data about driving habits to the carrier.

At least 18 states have 4 or more Personal Auto programs implemented, and 49 states have at least 1 program implemented.  In December 2012, Strategy Meets Action released research findings that about 70% of carriers have a UBI program in place, in pilot, or under consideration.  It was noted that if UBI captures only 10% of the market by 2020, 25 million cars will be insured through some type of UBI program.   If UBI captures 20-25% of the market, carriers without UBI will see the impact of adverse selection on their current book-of-business.

So what kinds of customers are carriers targeting, and if UBI takes hold of the market as promised, who will be left in non-UBI programs?

The obvious answer to the first question is safe drivers – the very slice of the market that every carrier wants to attract and to retain.  Progressive has released findings from its detailed analysis of 5 billion driving miles that demonstrated that drivers with the highest-risk driving behaviors have loss costs that are approximately 2.5 times the loss costs of drivers with the lowest-risk driving behaviors.   By targeting these lowest-risk drivers with special discounts, carriers attract the best of the best while improving their overall book of business.  Once a safe-driver is enrolled in the program, the special discounts also improve retention because the discounts get larger.  Given the proprietary nature of the driving behavior data that the carrier has collected, it is much harder for another carrier to match or beat that price point.

Beyond the safest drivers, there are other market niches that are well-suited to UBI programs. Consider the household with teen drivers or with aging drivers. UBI is an attractive product because it offers a way to monitor driving behavior among higher risk drivers within the household, and the very act of monitoring driving behavior and the feedback mechanisms have been shown to improve their driving behaviors. UBI programs are also a good fit for households where one or more vehicles see little use. With a growing cadre of telecommuters in the workforce and growing numbers of retiring baby boomers, how many vehicles sit parked for days at a time, especially during peak drive times?  Even if these drivers aren’t among the safest of drivers, their limited usage mitigates their exposure. Finally, consider the driver who has had 1 or 2 tickets or 1 or 2 accidents but is convinced that he/she is a safe driver; they were just unlucky. A UBI program allows these drivers to prove that they are safe drivers, lowering their rates and allowing the carrier to capture a truly safe driver that other carriers write-off as accident prone. At worst, a UBI program ensures that these drivers will pay rates based on their actual driving behavior, and the feedback loop provided with the programs can actually improve their driving behavior.

So who is left?   The drivers left outside a UBI program fall into two categories – those who could benefit from a UBI program but haven’t made the switch yet, and those unsafe drivers who would be penalized by entering a UBI program.

As better drivers join UBI programs, the majority of drivers in non-UBI programs will reflect poorer driving habits and much poorer claims experience. Carriers who offer only non-UBI programs will see their loss ratios deteriorate which will force rates higher. However, this will simply give the remaining safer drivers an even greater incentive to switch to carriers with a UBI program.  The market will bifurcate and carriers without a UBI program will find themselves essentially managing a book-of-business that is focused on non-preferred business.

The later that a carrier chooses to launch a UBI program the harder it will be to capture desired market share. At this point, the driving behavior associated with these programs is proprietary to the carrier.  While that may change in the future, it is currently impossible to purchase a driving score in the same way that a carrier purchases a credit score for a prospective insured. Therefore, once a driver is tied to a carrier’s program, it will be difficult to lure that driver to another program because the new carrier won’t know nearly as much about him/her as the current carrier.

The questions that remain are: how quickly will customers embrace these programs; how quickly will this change happen?   UBI programs have the potential to upend the Personal Auto market in much the same way that the introduction of credit scores did.   Will 2013 be the year that we begin to see real evidence of this coming trend?