"Rapid Expansion" Expected in Insurers’ Use of Vehicle Data

According to a new report, North American insurers are about to embrace usage-based insurance (UBI) in large numbers. However, UBI has divided opinion: some believe it leads to more accurate forecasting, but others are concerned about its impact on risk pooling and consumers.

Thanks to devices fitted within customers’ vehicles, usage-based auto insurance programs calculate policy discounts by analyzing data transmitted from driver to insurer. They take into account various elements; mileage is most frequently used, followed by time of day, braking, and speed.

If the new report from research firm Strategy Meets Action (SMA) proves accurate, such technology will "rapidly" expand among North American insurers this year. SMA found that 70 per cent of auto insurers are executing, developing, or planning UBI programs, and Richard Welch, guest author of the report, said: "2013 is likely to be characterized by a rapid expansion of the number of companies offering UBI options to their customers."

Almost half of the 110 North American insurance professionals who participated in the survey said customer retention was a major benefit. They also highlighted more accurate ratings, reductions in costs, and better claims control.

Canadian supporters of UBI include Québec-based Industrial Alliance. It offers Mobiliz, which it says is "specially designed to raise awareness about responsible driving". A device informs the motorist about his or her travel on a weekly basis, allowing them to improve and thereby save money on their insurance premium. Another major exponent of such data is Progressive Insurance in the U.S., which has programs active in 43 states. Its Snapshot device has been used by more than a million drivers, and its website informs customers that the in-car electronics will transmit such information as their mileage, how many times they brake, and how often they drive between midnight and 4 a.m.

However, the use of UBI may be subject to some criticism. As the information collected from insured individuals becomes more plentiful and more specific, it may become more challenging to effectively spread risks across insured groups.

The Financial Services Commission of Ontario (FSCO) is among the regulators looking at UBI programs. At a recent meeting, FSCO’s Bruce Green said the regulator was considering conditional approval for some UBI programs, which had to meet various criteria, including that rates must be reasonably predictive of risk and must distinguish fairly between risks. He added that such programs should also be voluntary and not initially be used for underwriting purposes (mid-contract or at renewal time). Insurers should also cover the costs involved.

Justin Pursaga, FCIA, FCAS, pictured, is manager of actuarial analytics at Wawanesa Mutual. So far his company has not incorporated UBI programs into its services, but he said it was "paying close attention" to this area. UBI data could provide more accurate and fairer pricing, he explained: "We use traditional rating variables like years licensed, gender, and so on, but these are just proxies for expected claims costs. Telematics [the combinations of telecommunications and data sources that make UBI programs possible] track real causative factors.

"Variables like gender and age are not controllable by the policyholder, but telematics track the way they actually drive, and studies have shown there is a resulting reduction in vehicle accidents among those who are being monitored."

Consequently, discounts and more accurate policy pricing would make insurers that offered UBI programs increasingly attractive, said Mr. Pursaga. "For the moment it is a missing variable that some companies are not using. Those who do not have these programs will inevitably suffer from adverse selection."

Marc-Olivier Faulkner, FCIA, FCAS, is actuarial senior manager in personal lines pricing for Aviva, and Chair of the CIA’s Property and Casualty Research Subcommittee. He said the subcommittee had discussed usage technology: "We are a bit skeptical about the success of this new technology in Canada but UBI would be more acceptable than using credit scores and could bring a lot of benefits to the market.

"Companies that do UBI right will have a big competitive advantage, and the most promising program so far is the one from Industrial Alliance. But that is targeted at a niche market: young drivers."

M. Faulkner added that Canadian insurers were behind their U.S. counterparts in the implementation of UBI programs, even though they had obvious benefits: "They offer you new information and show clear causal effects, which means they have a higher acceptance potential. People generally agree that if their driving is bad then they will have a higher premium."