Until now, U.S. insurers have intentionally restricted the impact of their telematics programs by holding riskier drivers harmless. In other words, insurers told policyholders entering into their telematics programs that their premium could only go down or remain the same. Higher risk drivers' premiums would not be increased even if the telematics device revealed driving behavior that actually warranted a higher premium.
But now the world has changed.
In its 2014 annual report, U.S. telematics leader Progressive dropped a bombshell that it is "affording more customers discounts for their good driving behavior while for the first time, increasing rates for a small number of drivers whose driving behavior justifies such rates" (Celent emphasis). A Progressive representative estimated that about one-fifth of all Snapshot drivers may see a rate increase.
Progressive's Snapshot program is available to agency and direct customers in 45 states. In 2014 it wrote an impressive $2.6 billion of premiums for Snapshot customers. The Snapshot portion of Progressive's business is growing considerably faster than its entire auto book of business; the carrier is also making other refinements in Snapshot by making the amount of the enrollment discount vary by customer segment.
Progressive's decision to raise premiums for policyholders whom Snapshot reveals to be poor drivers is no more than actuarial common sense. Progressive is saying that whenever its telematics data indicates a higher premium for a given policyholder, it will charge that higher premium. If that policyholder can find a lower premium at another insurer, Progressive is quite happy to have that other insurer issue that policy, leading (on average) to higher losses, for a lower (i.e., inadequate) premium. In insurance, this is known as the other insurer experiencing adverse selection.
In a way, this new development in the Snapshot program is no more than an extension of Progressive's well-known Comparison Rate program, which gives a potential policyholder an indication of how much a Progressive policy will cost versus a policy from other leading insurers. Progressive is offering Comparison Rates for about 15 different lines—ranging from auto to home to snowmobiles to life, health, and pet. (For more details about Comparison Rates, ask Flo.)
If a competitor wants to charge a prospect a lower rate than what Progressive believes is the right premium, Progressive is quite happy to have that prospect take their business to that competitor. Once again, Progressive is imposing adverse selection on another insurer.
At its most basic level, being a successful insurance company is simple. Understand the risks that are submitted to your underwriters, and charge the right premium for those risks. Progressive is not a stupid company. With this announcement, Progressive is signaling that its Snapshot telematics program lets it charge a more accurate and higher premium to certain risky drivers—and it jolly well will do it.
There are some big questions still to be answered. Even companies that are not stupid occasionally make mistakes. It is possible, for example, that Progressive is underestimating the amount of business it will lose when certain Snapshot policyholders leave after seeing their premiums increase. It is also possible that Progressive will not raise risky drivers' premium by a sufficient amount for the actual losses they will incur. However, give Progressive's sizable data trove and actuarial acumen, I personally am not going to bet against them.
Other auto insurers will have to do their own analyses, using either their internal telematics data or external aggregated data. If their telematics data leads to the same conclusion, they will have to follow Progressive's lead. The iron law of the competitive market applies: eat or be eaten.
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