June 23, 2011

RELATED: Consumer Comfort, Less Costly Technology and Better Pricing Models Lead Stronger Push Toward Pay-As-You-Drive... Telematics: Reinventing Auto Insurance... Progressive Changes Telematics Program Name

Call it Pay-As-You-Drive (PAYD) or call it usage-based auto insurance (UBI), telematics-powered auto insurance is taking off.

In Europe, usage-based auto insurance got a boost from a regulation mandating that new cars manufactured in the European Union have a "black box" telematic advice installed, as Cathering Stagg-Macey of Celent reports:

This is part of a pan-European initiative called e-Call which links up emergency services across the region. So if you are holidaying in France, in a new car, and have an accident, your telematics device makes a call into the local emergency services. The idea being that quick responses to accidents will save lives.

Even without such regulation, telematics-based insurance is blossoming in the United States.

Towers Watson announced earlier this week that it is working with several large insurers and has gathered information from thousands of vehicles across the country as part of what it calls its DriveAbility offering. The service provides analytical support for insurers, which the vendor says translates to an individual score for each vehicle to both inform auto policy rating and encourage safer driving habits.

According to Towers Watson director Robin Harbage, Progressive has more than 250,000 insureds enrolled in its Snapshot Pay-As-You-Drive program. Insurers representing an additional 20 percent of private personal auto premium are running or preparing to run internal UBI pilots, according to Harbage. From a geographic perspective, UBI programs have been implemented in each state except Hawaii, and 17 states have implemented at least four personal auto UBI programs.

"Others have not been as forthcoming, but we know that insurers who represent over 60 percent of the US market share for private passenger auto have already introduced some form of usage-based insurance in consumer insurance products for one or more states," Harbage tells Insurance & Technology.

Usage-based personal auto insurance sputtered when originally pioneered by Progressive in the U.S. in the early 2000s, though the company's methodology was used with greater success in the U.K. Public reluctance to take advantage of usage-based insurance in the U.S. was largely a matter of privacy, related to a perception that such products introduced an element of "Big Brother is watching you" to one's private life. However, in the intervening years consumers' attitudes have softened, among other factors that sweeten the usage-based proposition in the consumer's mind, suggests Celent's Stagg-Macey.

The industry has learnt much about telematics since the early part of the last decade. There are a variety of ways to gather data from black boxes, and not all data is required to be kept and stored. Consumer attitudes, whilst still varying regionally, seem less hardened to the idea of being monitored. There are several companies offering turnkey solutions to insurers -- from installing the device, collecting the data and providing the analytics.

Insurers' offerings are also evolving to new, more sophisticated models, Stagg-Macey says:

Perhaps the biggest shift is from what has been called pay-as-you-drive to pay-how-you-drive. The first model based on utility pricing can't take into account the difference in risk between young and experienced drivers. It doesn't take into account the different risk of country roads and highways. Behavioral-based pricing is the evolution from the utility model.

Some market leaders will use telematics-based products as a differentiator, but all the large auto insurers will need to review telematics in order to be compliant with impending legislation, Stagg-Macey says.

"It's now the right time to review telematics," Stagg-Macey advises.

ABOUT THE AUTHOR
Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek ...