Usage-Based Insurance: What's on the Horizon?

Usage-Based InsuranceA revolution is under way

A presentation to OII’s 2013 Insurance Education Day Advisory CouncilBy Katie DeGraaf

April 2013

© 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com2

• What is UBI?• UBI Benefits• UBI Marketplace• The Product Roadmap• Data, data, data• Conclusion

What is UBI?


Usage-based insurance (UBI)

Insurance Premium

$1,200

$1,080

$1,000

$ 900

Insurance Premium

$1,200

$1,080

$1,000

$ 900

Vehicle Score

VIN: 12345…Miles driven: 6,234Event 1 per mile: .05Event 2 per mile: .01

Insurance Premium

$1,200

$1,080

$1,000

$ 900

Company Feedback

Customer Feedback


Customer installation experience


Telematics devicesComponents

GPS Satellite GPRS

GPS Chip SIM Card

Device

OBD Port Accelerometer

Vehicle ARM Chip RAM Chip

The Benefits


Consumers

RegulatorCompany

More accuratepricing

Significantlyreduced

risk

Societally beneficial

Product differentiation

Better claims-

handling

UBI benefits all key stakeholders

Insurers Enhanced pricing Product differentiation and brand

awareness Reduced loss costs Improved consumer satisfaction

and retention

Regulators Saves lives “Fairly” discriminatory variables Consumer acceptance and

premium control Environmentally friendly

Consumers Control of premium Understandable rating based on the

how, when, where of driving Access to useful driving feedback Value-added services Green and progressive products

9© 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com

Publicly available studies have confirmed the potential power of even the most basic information

Enhanced pricing accuracy

“We believed that driving behavior was the most predictive rating factor —but didn’t expect the difference to be this dramatic. Actual driving behavior predicts a driver’s risk more than twice as strongly as any other factor.”

— Glenn Renwick, CEO, Progressive


Those who perceive their vehicle is operated better than average opt in: Safe drivers Low annual mileage vehicles Highly engaged parents Drivers who had unlucky accidents

Early adopters will win Latecomers will face adverse selection

Self-selection effect

$1,000 $1,000 $1,000 $1,000

$800


Iron Mountain: 93% reduction in fleet crash rate Iceland postal service reduced crash rate by 56% Pepsi (Iceland) reduced fleet crash rates by over 80% GreenRoad: 54% improvement in fleet crash rate

Reduced frequency of claims


0102030405060708090

100110120130

Vehi

cle

Scor

e

Vehicle Score Over TimeActively Monitored Passively Monitored

DriveCam: 50% average reduction in crash rates Insure The Box (U.K.): 35% – 40% reduction in crash rates by young

drivers

Reduced frequency of claims


• Emergency response• Faster accident response has saved lives• Claim circumstances• Vehicle recovery

Improved claims-handling


Control Safety Options Engagement

Improved customer experience

UBI Marketplace


Global development is under wayPace of development varies by region

U.S. and Canada

Significant UBI penetration and

established programs

EMEAUBI behind U.S., but significant

activity

AsiaLimited

activity, but emerging interest


47 states have 4+ personal auto UBI programs implemented

Widespread presence of personal lines programs in U.S.


Proliferation of UBI programs over the years

1997Progressive Autograph pilot

2004 – 2006 GMAC Low-mileage discount Progressive Tripsense pilot Milemeter

2008 – 2009 Progressive MyRate American Family Teen Safe Safeco Teensurance Travelers Intellidrive

2010 Safeco Rewind Esurance Mileage State Farm OnStar AAA, NCNU uDrive AAA, ACSC

2011 Progressive Snapshot State Farm Drive Safe and Save Allstate DriveWise Nationwide SmartRide Hartford TrueLane

2012 Esurance

DriveSense/Drive Less Save More

State Farm Ford Sync CSE Save Elephant DriveIQ 21st Century DriveIQ DTRIC Akamai Metro Mile


Progressive has led the market

Source: Progressive website.


Progressive Snapshot DiscountSM — 44 states and D.C.

“Nearly half a million drivers have participated countrywide to get personalized car insurance rates by sharing a picture of how they drive.”

— Richard Hutchinson, UBI general manager


Three Drive Safe & Save programs 10% enrollment discount; up to 50% at renewal Packaged services for purchase

State Farm has taken a different approach

“Provide drivers with a wide range of new options that will make for a smarter vehicle and even smarter driver” — Mike Wey, State Farm

The Product Roadmap


Product differentiation

Progressive

Feature Focus Price Proposition


The Customer — Determine the right customer value proposition for your company

Behavioral Change

Personaland Family

SecurityValue-Added

ServicesInsuranceDiscounts


Business optimization

Knowledge creation and decision support

Analytics

Infrastructure

Telematics

Devices

Valu

e

Strategy — Imperative to determine the strategy first


What are the challenges?

Define Goals and Design

ProductLegal and Regulatory

Technology Infrastructure

Collect and Analyze Data Use Results

Data, data, data


1,200 records of data

• Consider a typical commuter

UBI data is different

20-minute commute

500,000 records of data

Twice daily commute, 5 days a week

That’s just one vehicle!


Example trip


What is needed for proper score development?

0

5

10

15

20

25

30

35

40

45

50

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

1 2 3 4 5 6 7 8 9 10

Num

ber o

f devices

Loss Ratio

Score Decile

Expected Loss Ratio by Score Band

Number devices Expected Loss Ratio

Continuous analysis

Collect granulardata


Example: Data collected every kilometer

Parking lot

Freeway


Example: Data collected every minute

Parking lot

Freeway


Example: Data collected every second

Parking lot

Freeway


Granular data facilitates data cleansing


Data fuels added servicesfor added-value and revenue-generating services

Emergency call

Use 3D-Accelerometer and OBD speed to detect significant impacts

Use cellular connection to post an SMS with details

Emergency call

Use 3D-Accelerometer and OBD speed to detect significant impacts

Use cellular connection to post an SMS with details

Breakdown service

Ability to trigger a “Where am I?” SMS message from the server, to assist a customer breakdown call

Breakdown service

Ability to trigger a “Where am I?” SMS message from the server, to assist a customer breakdown call

To pre-defined numbers for call center support

Limited phone capability

To pre-defined numbers for call center support

Limited phone capability

If linked to a PND screen in car

Satellite navigation

If linked to a PND screen in car

Satellite navigation

Distinguish business travel from personal use

Business trip log

Distinguish business travel from personal use

Business trip log

Theft service

Detect motion without ignition start-up Tracking and call for help (in extreme implementations,

disable the car)

Theft service

Detect motion without ignition start-up Tracking and call for help (in extreme implementations,

disable the car)

Activates Geo-fence and other driving thresholds via an SMS message

Remote safe mode activation

Activates Geo-fence and other driving thresholds via an SMS message

Remote safe mode activation

Geo-fence service

Detect location outside boundary zone Trigger notification (in extreme implementations, disable

the car) Notification of driving exceeding other thresholds (speed,

braking)

Geo-fence service

Detect location outside boundary zone Trigger notification (in extreme implementations, disable

the car) Notification of driving exceeding other thresholds (speed,

braking)

Real-time buzzer in car facility Reports and mapping in customer portal website

Driver feedback

Real-time buzzer in car facility Reports and mapping in customer portal website

Driver feedback

Maintenance and fault diagnosis via customer portal

Vehicle wellness


>70% welcome telematics to reduce their premiums Foursquare, Facebook Places, iPhone, E-Z Pass, apps Sensitivity lies in the length of time the data is held Key is to provide high value in exchange for information

Privacy

Conclusion


Don’t get left behind There’s something in it for everyone Focus on strategy and data, not devices

Takeaways


Katie DeGraafChicago, IL

M: 708.714.4401

[email protected]

Documents

Usage-Based Insurance: What's on the Horizon?