Unless you live totally off the grid, you have seen a commercial for Progressive’s Snapshot program. Progressive and other major carriers are offering and forcefully marketing usage based insurance (UBI) to their customers. The idea behind usage based insurance (a.k.a. Telematics) is that the insured’s premium is based on his/her actual driving behavior as captured by a device that is plugged into the vehicle and transmits data about driving habits to the carrier.
At least 18 states have 4 or more Personal Auto programs implemented, and 49 states have at least 1 program implemented. In December 2012, Strategy Meets Action released research findings that about 70% of carriers have a UBI program in place, in pilot, or under consideration. It was noted that if UBI captures only 10% of the market by 2020, 25 million cars will be insured through some type of UBI program. If UBI captures 20-25% of the market, carriers without UBI will see the impact of adverse selection on their current book-of-business.
So what kinds of customers are carriers targeting, and if UBI takes hold of the market as promised, who will be left in non-UBI programs?
The obvious answer to the first question is safe drivers – the very slice of the market that every carrier wants to attract and to retain. Progressive has released findings from its detailed analysis of 5 billion driving miles that demonstrated that drivers with the highest-risk driving behaviors have loss costs that are approximately 2.5 times the loss costs of drivers with the lowest-risk driving behaviors. By targeting these lowest-risk drivers with special discounts, carriers attract the best of the best while improving their overall book of business. Once a safe-driver is enrolled in the program, the special discounts also improve retention because the discounts get larger. Given the proprietary nature of the driving behavior data that the carrier has collected, it is much harder for another carrier to match or beat that price point.
Beyond the safest drivers, there are other market niches that are well-suited to UBI programs. Consider the household with teen drivers or with aging drivers. UBI is an attractive product because it offers a way to monitor driving behavior among higher risk drivers within the household, and the very act of monitoring driving behavior and the feedback mechanisms have been shown to improve their driving behaviors. UBI programs are also a good fit for households where one or more vehicles see little use. With a growing cadre of telecommuters in the workforce and growing numbers of retiring baby boomers, how many vehicles sit parked for days at a time, especially during peak drive times? Even if these drivers aren’t among the safest of drivers, their limited usage mitigates their exposure. Finally, consider the driver who has had 1 or 2 tickets or 1 or 2 accidents but is convinced that he/she is a safe driver; they were just unlucky. A UBI program allows these drivers to prove that they are safe drivers, lowering their rates and allowing the carrier to capture a truly safe driver that other carriers write-off as accident prone. At worst, a UBI program ensures that these drivers will pay rates based on their actual driving behavior, and the feedback loop provided with the programs can actually improve their driving behavior.
So who is left? The drivers left outside a UBI program fall into two categories – those who could benefit from a UBI program but haven’t made the switch yet, and those unsafe drivers who would be penalized by entering a UBI program.
As better drivers join UBI programs, the majority of drivers in non-UBI programs will reflect poorer driving habits and much poorer claims experience. Carriers who offer only non-UBI programs will see their loss ratios deteriorate which will force rates higher. However, this will simply give the remaining safer drivers an even greater incentive to switch to carriers with a UBI program. The market will bifurcate and carriers without a UBI program will find themselves essentially managing a book-of-business that is focused on non-preferred business.
The later that a carrier chooses to launch a UBI program the harder it will be to capture desired market share. At this point, the driving behavior associated with these programs is proprietary to the carrier. While that may change in the future, it is currently impossible to purchase a driving score in the same way that a carrier purchases a credit score for a prospective insured. Therefore, once a driver is tied to a carrier’s program, it will be difficult to lure that driver to another program because the new carrier won’t know nearly as much about him/her as the current carrier.
The questions that remain are: how quickly will customers embrace these programs; how quickly will this change happen? UBI programs have the potential to upend the Personal Auto market in much the same way that the introduction of credit scores did. Will 2013 be the year that we begin to see real evidence of this coming trend?