Usage-Based Insurance Next Wave for Personal Auto

Personal auto insurance is already the most commoditized line of property/casualty insurance and is likely to become the most exact of the lines in terms of underwriting as insurers spread the movement known as usage-based insurance.

The number of insurers continues to grow, according to Robin Harbage, director, Towers Watson, and co-author of a report on the subject, "The Brink of a Revolution.

"We are seeing the U.S. market become almost a hotbed [for usage-based insurance]," he said.

Progressive has been an early adopter and continues in that direction, having introduced its usage-based product in 37 states and the District of Columbia, explains Harbage.

But Progressive isn't alone. Harbage reports the list of insurers offering some type of UBI at this point is "a who's who of insurance."

Among the names bandied about are State Farm, Allstate, Nationwide, The Hartford, and Travelers, as well as many smaller insurers on the list.

Towers Watson estimates auto insurers representing 60 percent of the passenger auto market, have launched a product it in at least one state.

"It's not just an experiment anymore; it's a mainstream product for some of these companies and they are pushing forward on a rapid basis," says Harbage.

At this point in time, all the major insurers are operating with it as a voluntary program, so consumers can take it or follow the traditional process for their personal auto product, points out Harbage.

Harbage explains the devices used to track driving habits vary. Some new cars offer original equipment devices, such as OnStar for GM vehicles and Sync from Ford.

"Those devices track the mileage and behavior of the drivers as they operate the vehicle," he says. "That's used to create discounts for the insureds on their better-than-average driving or less-than-average mileage."

The common standard, explains Harbage, is the device plugs into the onboard data port, which was mandated for all vehicles beginning in 1996 by the EPA. The port—which also performs emission checks—is linked directly to the onboard computer so anything drivers can see on their dashboard—RPMs, mileage, speed as well as changes in speed—can be recorded.

In addition, most of the devices are coming out with GPS units on them, according to Harbage.

"They get quite a bit of information about the way the vehicle is operated," he says.

The information received from the cars is both valuable and predictive.

"Most of what insurers rated on for years were things like a driver's age, gender, marital status or something more intrusive like credit scores," says Harbage.

Insureds—not surprisingly—often wondered how such information related to driving habits, according to Harbage.

"The newer information is not just related to your driving; it is your driving," he says.

"It's a quantum leap forward in predicting behavior," adds Harbage. "It's taking information, such as where you are driving the vehicle, how fast you are driving, rapid accelerations, decelerations, aggressive maneuvers, and data such as that. Insurers believe there is a certain population of drivers that want to prove they are safe drivers and they are earning substantial discounts. Most insurers are offering up to 30 percent discounts based solely on the information provided from the devices."

Towers Watson is a global professional services company and one of its strengths is risk management, explains Harbage. The company is helping insurers determine the best way to collect and use data such as what onboard computers are offering.

"Most of the smaller insurers are saying [the amount of data] is a bit daunting," says Harbage. "They don't quite know what to do with it all. It's unlike any data they've seen before. Luckily, we employ people who have worked with this kind of data before."

Insurers are unsure what the discounts should be.

"Much like a credit scores, there's a score based on the operation of the vehicle: where it's driven, when it's driven, how it's driven, how long it's driven," says Harbage.

As programs expand among, Harbage believes good drivers will step forward and volunteer to be a part of the program.

"What will happen is the other insureds will remain with the insurers not offering these programs and they will begin to see the rate creep up as drivers that don't volunteer for these programs become the bulk of the residual pool," he says.