In early 2016, we wrote about telematics, or usage based insurance (UBI), and its effects on the insurance industry. In 2019, the UBI market reached an estimated $24 billion, and projections are that the market will grow to $125.7 billion by 2027.
Usage-based insurance can also be referred to as Pay-As-You-Drive (PAYD), Pay-How-You-Drive (PHYD), Pay-As-You-Go, and Distance-Based Insurance. All of these terms refer to telematics. A telematics device — also called a black box or a dongle — is a small device that plugs into a vehicle's diagnostic port, or it may be integrated into the vehicle itself, to track the mileage and monitor the driver's behavior. A SIM card and modem in the device enables telecommunication of this information via a cellular network.
Telematics devices are able to measure a number of elements of interest to underwriters, including miles driven, time of day driven, where the vehicle is driven (Global Positioning System or GPS), rapid acceleration, hard braking, sharp cornering, and airbag deployment. The level of data collected generally reflects the type of telematics technology in use and the driver's willingness to share personal data. The basic idea of UBI is that a driver's behavior is monitored directly while the person drives, allowing insurers to more closely align driving behaviors with premium rates.
For example, a driver who drives long distances at high speeds with sudden braking and cutting sharply on turns will be charged more than a driver who drives short distances without the need for hard and fast braking and cutting sharply on turns. Advances in technology have increased the effectiveness and cost of using telematics, enabling insurers to capture not just how many miles people drive, but how and when they drive too. For example, at least one carrier gives discounts to drivers who avoid driving between midnight and 5 a.m. and also have safe driving habits. Being out on the roads at those hours puts drivers at risk of sleepiness or encountering other drivers who are sleepy or who have been out drinking late into the evening.
Currently Allstate has two different UBI systems; Drivewise, which offers discounts based on the driver's habits, and the new Milewise, which uses the technology to charge a per-mile rate based on usage. While these rates can be changed every month, Allstate is working to improve the technology to be able to adjust rates on a weekly basis. While Milewise is live in fourteen states the weekly rates are being tested only in Arizona. A dongle is required for Milewise, while Drivewise can be used from any mobile device.
Nationwide Insurance and Toyota have joined together to provide usage-based insurance for buyers of model year 2018 to 2020 cars equipped with the Toyota Communications Module. If they buy a Nationwide SmartRide policy they receive a 10 percent discount once they opt into sharing their data. The system is currently available in Ohio, Arizona and Texas. The system is called TIMS (Toyota Insurance Management Services) BrightDrive, and allows data collected directly from the car to be used in establishing premium rates for the driver. The management service itself is an independent insurance agency selling Property & Casualty coverage, owned in part by Toyota Financial Services. Toyota has so far partnered with Nationwide, Travelers, and Safeco. Aside from the BrightDrive system, Toyota is offering Toyota owners the opportunity to opt in to have their driving data collected; at the end of 90 days, the owner will be notified as to whether he is eligible for a quote based upon his driving data. Users can also get a free annual report of their driving data. UBI is currently offered in all states except Alaska, California, Hawaii, North Carolina and New York.
Metromile uses a dongle that plugs into the vehicle, and then uses a base rate plus miles driven to establish a premium. Traditional factors such as age, age of vehicle, driving experience, Once a base rate is established, an additional charge is added for miles driven. When a driver travels over 250 miles in one day those additional miles are not counted. That is likely to be an unusual situation such as traveling on vacation or similar activities.
With UBI, premiums are collected using a variety of methods, including debit accounts, direct billing and smart card systems. UBI has the advantage of utilizing individual and current driving behaviors, rather than relying on aggregated actuarial statistics and driving records that are based on past trends and events, thus making individual premiums more precise.
Because of some privacy concerns, some states have enacted legislation requiring disclosure of tracking practices and devices. Additionally, some insurers limit the data they collect. Although not for everyone, acceptance of information sharing is growing as evidenced by the growth of such social programs as Twitter, Facebook, Instagram, etc.
Technological advances in telematics are also driving changes in the insurance market and its impact on insurers, consumers, state insurance regulators, and society. First, linking insurance premiums more closely to actual individual vehicle or fleet performance allows for more accurately priced risks. It increases affordability for lower-risk drivers (many of whom are also lower-income drivers). Further, the use of telematics helps insurers more accurately estimate accident damages and reduce fraud by enabling them to analyze the driving data (such as hard braking, speed, and time) during an accident. This additional data can also be used by insurers to refine, differentiate, or create new UBI products and incentives.
Consumers in general are given more control over their premium costs through carrier incentives for lower mileage and safer driving. In 2017, according to the National Association of Insurance Commissioners (NAIC), about 80 percent of new car sales in the U.S. were equipped with on-board telematics. In 2020, 70 percent of all auto insurers are expected to use telematics. The dominance of premium cars increases the number of purchasers of usage-based insurance as their regular insurance is very high. With the help of usage-based insurance, some vehicle owners can save up to 30 percent on insurance.
Telematics also allow fleets to determine the most efficient routes, saving them costs related to the number of drivers, gas, and maintenance. Light-duty vehicles, such as passenger cars and light commercial vehicles, can be easily fitted with telematic devices enabling them access to UBI programs. Also, as these vehicles are generally driven by a single person, UBI plans based on driver behavior are ideal for this vehicle segment. Further, leading companies are developing various products and solutions for these vehicle types such as ride sharing and autonomous vehicles. For instance, in March 2018, Allstate partnered with Uber to protect drivers and passengers by offering commercial auto coverage. The partnership enabled Allstate to expand its leadership in personal transportation solutions into the commercial insurance market.
In turn, fewer miles driven and safer driving habits aid in reducing accidents, congestion, and vehicle emissions, all of which also benefit society. UBI programs also help to lower accident and vehicle theft related costs by improving accident response time and allowing for stolen vehicles to be tracked and recovered.
However, implementing a UBI program utilizing telematics can be costly and resource intensive to the insurer, as they rely heavily on costly technology to capture and refine driving data. Despite its growth, UBI is still an emerging area and thus there is still much uncertainty surrounding the selection and interpretation of driving data and how that data should be integrated into existing or new price structures to maintain profitability. This is particularly important, as the transitioning of lower-risk drivers into UBI programs that offer lower premiums could put pressure on overall insurer profitability.
Insurers must also manage state regulatory requirements, and many states require insurers to obtain approval for the use of new rating plans. Rate filings usually must include statistical data that supports the proposed new rating structure. Although there are general studies demonstrating the link between mileage and risk, individual driving data and UBI program specifics are considered proprietary information of the insurer. This can make it difficult for an insurer who does not have past UBI experience. Other requirements that could prevent certain UBI programs include the need for continuous insurance coverage, upfront statement of premium charge, set expiration date, and guaranteed renewability.
The rapidly increasing growth of the UBI market is influenced by such factors as the increasing sales of telematics-equipped vehicles and government regulations on safety and telematics services. In addition, the increasing number of companies offering free hardware for UBI has also contributed to the growth of the market. The anticipated increase in demand for connected cars and lower insurance premiums compared to regular insurance are additional reasons to expect further market growth.