It’s difficult to predict what the personal auto insurance market will look like by the turn of the next decade, but even conservative estimates indicate telematics and usage-based insurance (UBI) will become a catalyst for change, according to a recent Strategy Meets Action research paper.
Richard Welch, a former insurance CEO, is a guest author of the SMA report along with SMA partner Mark Breading, believes that even with just 10 percent of the market in 2020, that still means 25 million cars will be insured through some type of UBI program.
“That has strong implications for the rest of the insurance market,” says Welch. “If even 10 percent [of policyholders] move into this space it will have a significant disruptive impact on the market as a whole.”
Currently, the lure for customers appears to be discounts being offered when a policyholder agrees to use a UBI product. Welch doesn’t believe carriers can sustain such largesse indefinitely, though.
“The costs (for insurers) of setting up and running a UBI program are significant,” he says. “It is not possible at current costs to be able to profitably offer discounts across all segments of the market. As costs continue to fall, more of the market will be in a position where a company can [offer UBI] profitably.”
The potential to offer savings to drivers is significant, explains Welch, because one of the promises this technology offers is a change in driver behavior, which eventually could significantly drive down loss costs for the carrier.
“The other thing about discounts and reducing costs is it’s all about a better understanding of risks or more finite segments,” says Breading. “This gives insurers the opportunity to identify segments, reduce costs, and still be profitable. As that happens, that’s the catalyst for changing the marketplace.”
Personal auto insurers are positioning their companies to deal with the change from traditional underwriting to telematics and UBI, according to Welch.
“If you look at our survey, it indicates that about 70 percent of companies have a UBI program in place, are piloting one or are at least planning for the future,” he says.
Carriers that fail to keep up with the market changes run the risk of adverse selection. Welch has performed some modeling to understand the impact of adverse selection on the market and estimates that if 20 to 25 percent of the market is fully engaged with UBI, it will become essential for the rest of the market to jump in so they don’t end up with an adversely selected product.
“If a significant portion of the market shifts to UBI and the market becomes dominated by a few large players, it will be tough for the rest of the market to grow,” says Welch.
Welch explains it is difficult to make predictions on how the technology carriers employ to gather telematics information will play out. The survey showed the largest percentage of insurers believe the technology eventually will be built into vehicles, which means carriers will get their data directly from the vehicles. He points out, though, that such technology will come to pass only as new vehicles are built.
“It’s going to take a long time to get there, which means, in the meantime, there will be a robust market for aftermarket devices,” Welch says.
In the U.S., devices that are self-installed by consumers and tie-in to the diagnostic port on the vehicle are dominant. Welch contends the use of smartphones could change that pattern.
“Smartphones can do everything you need to get the data run to a UBI program, but there are some challenges associated with smartphone technology that make underwriters less comfortable,” says Welch. “The promise of the smartphone is there’s no hardware to deploy and it’s easy to get it out to a lot of places quickly.”
The challenge with smartphones arises from the data received and how complete it is, points out Welch.
“There are hurdles that have to be overcome in order for the smartphone to be a credible UBI device,” he says. “I’m not sure I can tell you what the answers are to all those issues.”
Insurers are concerned with the cost of telematics devices, but right behind that is the expense involved with systems integration. Still another issue is the new data that will be collected.
“At this stage, insurers are using just a tiny portion of the data,” says Breading. “If carriers begin to use more of the location-based information and information about vehicle characteristics and driver behavior, imagine collecting all that stuff every 60 seconds. You are talking about enormous amounts of data, but also enormous amounts of insight if you can figure out a way to analyze it.”
Yet another issue is the technology behind UBI, particularly the patents approved for Progressive and its Snapshot program. The carrier has sued competitors such as State Farm and The Hartford for what they contend is a violation of Progressive’s patents, but Progressive has licensed the technology to Allstate.
“That battle wages on,” says Welch. “From the interviews we did, the patent issue for mid-size and smaller insurers is significant. There are players intentionally on the sidelines until they get more clarity about these patent issues, although it’s not generally seen as a long-term problem.”
Welch reports that Progressive explained during a recent analyst call that they plan to broadly license the technology to competitors in 2015.
“On the one hand you can interpret that they are going to let the market open, but what is left unsaid is whether they are only going to license a generation behind where they are and will the price be prohibitive,” he says. “I do think the patents will come down as an impediment in the next three or four years.”
Today, Welch believes there are strong indications that fast movers will earn an advantage over the competition because they will be able to collect so much data earlier in the UBI process and iron out where the profitable segments are and where to attack them.
“Our respondents feel large companies are going to be at an advantage, but it’s also another place to look and see how things will change for the future,” he says. “There is a lot of discussion around whether aggregators are going to jump into this in a significant way. Driver scores in the future may be sold the way credit scores are sold today, which would open the market for smaller companies. ISO and LexisNexis have indicated they are interested in doing work behind the scenes on such a product.”