Thomas Hallauer gives an overview of Usage Based Insurance (UBI), an industry that is putting telematic devices into more vehicles than fleet management ever did.
The insurance market is going through a transformation phase never seen before. Insurers have not only started to track individual cars for Usage Based Insurance (UBI), they are also using the technology to enhance consumer services as more drivers join up to these schemes. Progressive Insurance in the US has 1.4 million customers signed up to
Thomas Hallauer gives an overview of Usage Based Insurance (UBI), an industry that is putting telematic devices into more vehicles than fleet management ever did.
The insurance market is going through a transformation phase never seen before. Insurers have not only started to track individual cars for Usage Based Insurance (UBI), they are also using the technology to enhance consumer services as more drivers join up to these schemes. Progressive Insurance in the US has 1.4 million customers signed up to its SnapShot programme while in the UK, the premium savings for young drivers are such that being tracked is becoming the default option. UBI or insurance telematics as it is also called, started as an insurer tool to retain customers who were good drivers. Traditional insurance policies do not differentiate between good and poor drivers and rely on static/statistical criteria to evaluate driver risk so, effectively, good drivers subsidise bad drivers.
With UBI the insurer uses dynamic parameters such as mileage, time of day, location, driver behaviour and context, when determining the policy premium.
To accessing the data most insurers use a sensor black box (BBX) installed in the vehicle or plugged to the vehicle’s OnBoard Diagnostic port (OBD Dongle). These devices are similar to fleet management systems and can detect a range of driving behaviour information, including harsh braking, sudden acceleration, aggressive cornering, tailgating, rapid lane changing, etc…
While there is a wide choice of data available to the UBI service providers, it is only useful until the most predictive criteria is identified: the key is to build enough experience and understanding of what really identifies risky behaviour and what type of behaviour is the most predictive in terms of accident frequency and gravity.
UBI service providers have analysed years of accumulated data to isolate and identify patterns in the accelerations/braking at low speed that indicates tailgating, or the swerves at high speed (on motorways) that characterise excessive lane changing. The algorithms are so advanced, that in a shared vehicle, they can recognise which driver is at the wheel after a few minutes.
Opinions on what is the most predictive data are split with each insurer assigning different weighting to each criterion. Most frequently mentioned are mileage, harsh braking and time of day but predictability is not linear and the true value comes when sensor data is augmented by:
• Historical data: Motor Vehicle Records (MVR), claims history, Customer data (age, gender…)
• Static factors: time, seasonality, crime rate in the area, geography...
• Dynamic data feeds such as weather or traffic
• Map attributes including road class, maximum speed, number of lanes, etc.
• Places (contextual location) such as crossings, schools, licensed establishments...
No only do the insurers want to use UBI as a way to attract new – and better – drivers by offering discounts, they can also protect drivers by using the BBX as a crash detector or even a fraud management system to disprove fraudulent claims.
Ultimately, it is a very potent tool to manage risk, as well as to create a relationship between insurer and insured.
For the driver, UBI represents the potential to get discounts on premiums. In the US this is for everyone while in Europe young drivers who pay double the average in premiums are the main target but the offering is very different (see below).
Other driver benefits include the ability to pay for insurance proportionally to the vehicle use. Pay as you drive (PAYD) and Pay How You Drive (PHYD) is an effective way for insurers to price their policy and to provide direct services to drivers. In Europe that includes driver feedback and trip logging enabling the drivers to check their routes, look at their driving behaviour and get tips on how to improve and reduce fuel consumption – all from a personal online dashboard. Such feedback is not seen in the US, where data is owned by the insurance carriers and patents held by Progressive restrict the link between behaviour and rating.
UBI is growing quickly and consultant Ptolemus has identified more than 88 trials in Europe including at least 67 commercial launches. And while UBI is an application of telematics in the simplest sense, the key difference is that UBI doesn’t look at individual events; it works out a profile over a longer time scale. So, contrary to many drivers’ fears, their rating will not be affected by one isolated harsh braking incident.
The likely evolution of UBI is via the smartphone. With penetration exceeding 50% and smartphone sensors mirroring those of BBX, Ptolemus expects it will become the most prominent device in UBI by 2015. Smartphones alone cannot guarantee the same data accuracy at the BBX but different algorithms are used to create a driver profile with enough detail for insurers to calculate the risk.
There remain major differences between UBI in Europe and the US. In Europe, UBI was initiated for the benefit of the insurance sector – mainly to combat fraudulent claims. Niches where the premiums are such as young drivers were targeted first and if the individual drives responsibly, their premium is reduced; and if they don’t, the rates are increased.
Conversely the US market is based on the principle that UBI is for everybody. Initial offerings were based on positive selection (prove you are a good driver to get a discount) rather than a way to combat fraud or the increasing cost of claims. This mindset means that in America UBI policies do penalise the driver for bad behaviour. Yet with the most mature market in the world and $526 million spent on advertising the benefits of UBI, a recent survey by Progressive showed 40% of the respondents wanted nothing to do with it.
The European tracking programmes are much more effective and precise. Solutions from InsureTheBox or Carrot Insurance have professionally installed devices in the vehicle that can differentiate between hitting a bump in the road and an actual car accident while speeding is immediately flagged and fed back to the driver as an event. The driver log, accessible online or via a smartphone app, highlights each event and shows its effects on the driver’s score.
Insurance premium prices have become more accurate, thanks to the predictive power of the telematics data. Where it has been introduced, the costs of the technology and premiums have fallen rapidly and accident rates have also declined. Lives have even been saved as the BBX sends an alert of a probable crash prompting some insurers, like InsureTheBox in the UK, to call the driver and notify the emergency services if necessary.
Again, the picture is different in the US. Chris Carver, Liberty Mutual’s product manager for telematics, commented: “What is really driving all these programmes is customer retention.”
In most cases, the programmes have received very positive feedback from participating drivers which, crucially, led to higher retention rates for the insurers. Progressive publicly announced that, on average, UBI retention is 18% better than normal accounts.
Other factors causing UBI growth include:
• The EU deployment of eCall in all new type-approved passenger cars and LCVs by 2015 means that sensor-based devices with functions similar to that of a BBX will be installed in more vehicles. Ptolemus estimates that UBI policies from the OEMs will grow rapidly at the end of the decade, but will still represent less than 20% of all policies in 2020.
• European legislation prohibits insurers differentiating policy rating by gender and many believe the driver’s age will also be banned as a rating factor. With their most predictive factors outlawed, underwriters will find telematics data increasingly useful.
• In Italy the Monti law could make telematics a mandatory offering for insurers
• With fuel prices soaring, UBI promotes driving less and driving better, which directly impacts fuel usage.
Ultimately, UBI can be a tool for retention but also for customer acquisition, positive selection, better risk and claims management and improved fraud control. The variety of usage has created a wealth of different business models which have accelerated the motor insurance industry towards being fairer and more efficient.
Drivers have the opportunity to save money by demonstrating their risk profile – often without loss of privacy as many programmes do not use GPS and only require the device to be installed for a short period.
What remains to be seen is what the impact monitoring devices will have on accidents, casualties, traffic conditions and road infrastructure.Thomas Hallauer is the research and marketing director at Ptolemus Consultancy Group which has just updated its UBI study with details on market evolution, business models and quantitative analysis. A free 60-page abstract is available at %$Linker:2 External <?xml version="1.0" encoding="utf-16"?><dictionary /> 0 0 0 oLinkExternal www.ptolemus.com/abstract0813 Visit: www.ptolemus.com/abstract0813 false http://www.ptolemus.com/abstract0813 false false %>
The insurance market is going through a transformation phase never seen before. Insurers have not only started to track individual cars for Usage Based Insurance (UBI), they are also using the technology to enhance consumer services as more drivers join up to these schemes. Progressive Insurance in the US has 1.4 million customers signed up to its SnapShot programme while in the UK, the premium savings for young drivers are such that being tracked is becoming the default option. UBI or insurance telematics as it is also called, started as an insurer tool to retain customers who were good drivers. Traditional insurance policies do not differentiate between good and poor drivers and rely on static/statistical criteria to evaluate driver risk so, effectively, good drivers subsidise bad drivers.
With UBI the insurer uses dynamic parameters such as mileage, time of day, location, driver behaviour and context, when determining the policy premium.
To accessing the data most insurers use a sensor black box (BBX) installed in the vehicle or plugged to the vehicle’s OnBoard Diagnostic port (OBD Dongle). These devices are similar to fleet management systems and can detect a range of driving behaviour information, including harsh braking, sudden acceleration, aggressive cornering, tailgating, rapid lane changing, etc…
While there is a wide choice of data available to the UBI service providers, it is only useful until the most predictive criteria is identified: the key is to build enough experience and understanding of what really identifies risky behaviour and what type of behaviour is the most predictive in terms of accident frequency and gravity.
UBI service providers have analysed years of accumulated data to isolate and identify patterns in the accelerations/braking at low speed that indicates tailgating, or the swerves at high speed (on motorways) that characterise excessive lane changing. The algorithms are so advanced, that in a shared vehicle, they can recognise which driver is at the wheel after a few minutes.
Opinions on what is the most predictive data are split with each insurer assigning different weighting to each criterion. Most frequently mentioned are mileage, harsh braking and time of day but predictability is not linear and the true value comes when sensor data is augmented by:
• Historical data: Motor Vehicle Records (MVR), claims history, Customer data (age, gender…)
• Static factors: time, seasonality, crime rate in the area, geography...
• Dynamic data feeds such as weather or traffic
• Map attributes including road class, maximum speed, number of lanes, etc.
• Places (contextual location) such as crossings, schools, licensed establishments...
No only do the insurers want to use UBI as a way to attract new – and better – drivers by offering discounts, they can also protect drivers by using the BBX as a crash detector or even a fraud management system to disprove fraudulent claims.
Ultimately, it is a very potent tool to manage risk, as well as to create a relationship between insurer and insured.
For the driver, UBI represents the potential to get discounts on premiums. In the US this is for everyone while in Europe young drivers who pay double the average in premiums are the main target but the offering is very different (see below).
Other driver benefits include the ability to pay for insurance proportionally to the vehicle use. Pay as you drive (PAYD) and Pay How You Drive (PHYD) is an effective way for insurers to price their policy and to provide direct services to drivers. In Europe that includes driver feedback and trip logging enabling the drivers to check their routes, look at their driving behaviour and get tips on how to improve and reduce fuel consumption – all from a personal online dashboard. Such feedback is not seen in the US, where data is owned by the insurance carriers and patents held by Progressive restrict the link between behaviour and rating.
UBI is growing quickly and consultant Ptolemus has identified more than 88 trials in Europe including at least 67 commercial launches. And while UBI is an application of telematics in the simplest sense, the key difference is that UBI doesn’t look at individual events; it works out a profile over a longer time scale. So, contrary to many drivers’ fears, their rating will not be affected by one isolated harsh braking incident.
The likely evolution of UBI is via the smartphone. With penetration exceeding 50% and smartphone sensors mirroring those of BBX, Ptolemus expects it will become the most prominent device in UBI by 2015. Smartphones alone cannot guarantee the same data accuracy at the BBX but different algorithms are used to create a driver profile with enough detail for insurers to calculate the risk.
UBI Growth
UBI is not yet global and is to be found primarily in the US, Italy and the UK. Other countries, including Australia, South Africa, Canada, France and Spain have limited programmes and every country throughout Europe and the Americas is conducting trials. By 2020 Ptolemus estimates UBI revenues in Europe will grow from €1 billion to €25 billion and in the US to €32 billion.There remain major differences between UBI in Europe and the US. In Europe, UBI was initiated for the benefit of the insurance sector – mainly to combat fraudulent claims. Niches where the premiums are such as young drivers were targeted first and if the individual drives responsibly, their premium is reduced; and if they don’t, the rates are increased.
Conversely the US market is based on the principle that UBI is for everybody. Initial offerings were based on positive selection (prove you are a good driver to get a discount) rather than a way to combat fraud or the increasing cost of claims. This mindset means that in America UBI policies do penalise the driver for bad behaviour. Yet with the most mature market in the world and $526 million spent on advertising the benefits of UBI, a recent survey by Progressive showed 40% of the respondents wanted nothing to do with it.
The European tracking programmes are much more effective and precise. Solutions from InsureTheBox or Carrot Insurance have professionally installed devices in the vehicle that can differentiate between hitting a bump in the road and an actual car accident while speeding is immediately flagged and fed back to the driver as an event. The driver log, accessible online or via a smartphone app, highlights each event and shows its effects on the driver’s score.
Insurance premium prices have become more accurate, thanks to the predictive power of the telematics data. Where it has been introduced, the costs of the technology and premiums have fallen rapidly and accident rates have also declined. Lives have even been saved as the BBX sends an alert of a probable crash prompting some insurers, like InsureTheBox in the UK, to call the driver and notify the emergency services if necessary.
Again, the picture is different in the US. Chris Carver, Liberty Mutual’s product manager for telematics, commented: “What is really driving all these programmes is customer retention.”
In most cases, the programmes have received very positive feedback from participating drivers which, crucially, led to higher retention rates for the insurers. Progressive publicly announced that, on average, UBI retention is 18% better than normal accounts.
Other factors causing UBI growth include:
• The EU deployment of eCall in all new type-approved passenger cars and LCVs by 2015 means that sensor-based devices with functions similar to that of a BBX will be installed in more vehicles. Ptolemus estimates that UBI policies from the OEMs will grow rapidly at the end of the decade, but will still represent less than 20% of all policies in 2020.
• European legislation prohibits insurers differentiating policy rating by gender and many believe the driver’s age will also be banned as a rating factor. With their most predictive factors outlawed, underwriters will find telematics data increasingly useful.
• In Italy the Monti law could make telematics a mandatory offering for insurers
• With fuel prices soaring, UBI promotes driving less and driving better, which directly impacts fuel usage.
Ultimately, UBI can be a tool for retention but also for customer acquisition, positive selection, better risk and claims management and improved fraud control. The variety of usage has created a wealth of different business models which have accelerated the motor insurance industry towards being fairer and more efficient.
Drivers have the opportunity to save money by demonstrating their risk profile – often without loss of privacy as many programmes do not use GPS and only require the device to be installed for a short period.
What remains to be seen is what the impact monitoring devices will have on accidents, casualties, traffic conditions and road infrastructure.Thomas Hallauer is the research and marketing director at Ptolemus Consultancy Group which has just updated its UBI study with details on market evolution, business models and quantitative analysis. A free 60-page abstract is available at %$Linker:
