Insurance telematics: US state regulators tackle UBI
Susan Kuchinskas explains how insurance telematics vendors can align themselves with various US state regulators to give their solutions the best growth potential
Technologists love their bright and shiny new apps; insurance regulators, not so much. Their responsibility to protect consumers' pocketbooks, lives and property on the roadways has made them conservative when it comes to insurance telematics. Nevertheless, change is afoot, albeit slow change.
Every state in the US has its own insurance commission and makes independent laws and regulations influenced by varying emphasis on risk factors and consumer protection issues. For example, in Illinois, insurers can innovate as they please, as long as they are completely transparent. On the other hand, in California, there are three mandatory ratings factors; the other factors insurers can use are also spelled out in regulations. "The freedom to use any rating factor is not the story in California," says Joel Laucher, a deputy commissioner for the State of California Department of Insurance. (For more on insurance telematics, see Special report: Insurance telematics.)
Fragmented regulatory environment
Dealing with 50 different sets of regulations makes insurance telematics in the United States highly complex. The lack of standards among states could be considered an artifact of the pre-Internet area, when local populations were more internally homogenous and more differentiated from others.
But Jim Stephens, deputy director of the Property Compliance and Licensing Division,Illinois Department of Insurance, sees an advantage: "Most of the companies appear to like it this way because it allows them to fulfill unique markets. They can handle themselves one way in Illinois and another way in California. It is a different marketplace.” (For more on insurance telematics in the US, see Insurance telematics in the US: Ready to grow?, Telematics and UBI: The regulatory opportunities , and Telematics and privacy: The impact of ‘do not track’ proposals.)
Bane or boon, telematics vendors must work within this fragmented regulatory environment. Insurance companies have already learned to work state-by-state, and that's why they must remain the lead partner for insurance telematics solutions. In fact, in many cases, it's insurers that are driving legislation and/or regulation to actively encourage usage-based insurance (UBI) in some states.
No state actively limits usage-based insurance plans per se. It's just that sometimes UBI conflicts with a state's philosophy about the best way to protect consumers. Factors that come into play include consumer privacy, rates based on factors that individual drivers can control, and the level of transparency required from insurers about their risk rating systems. In addition, while every state tries to get the best deal for consumers along with rate stability, some attempt to do so by controlling rates while others attempt to foster competition in order to drive rates down.
Illinois is an example of a state with regulations that have tended to foster pay-as-you-drive (PAYD) plans but indirectly inhibited pay-how-you drive (PHYD).
Illinois has what it calls open rating laws: Insurers can use whatever risk rating factors they want, and they can set rates as they want. All this is posted publicly on the state website. This has made it easy for insurance companies, notably Allstate and State Farm, to offer mileage-based rates that are verified by telematics devices.
On the other hand, the requirement for open posting of ratings systems means that companies like Progressive can't keep the predictive modeling formulas used for its SnapShot program secret. (SnapShot takes into account the number of miles driven, the time of day those miles are logged, and how often the driver makes sudden stops.)
Stephens admits that insurance companies see their ratings formulae as competitive advantages and don't want to make them public: "In Illinois, we had a problem with that. A lot of companies, like Progressive, have been reluctant to file their products here. They don't want their trade secrets to be open to the public."
Consumer awareness of usage-based insurance lags industry motivation, despite television and Web advertising by Progressive. But states are responding to insurer demand by tuning their regulations or passing new laws. (For more on consumers and UBI, see Smartphones as an incentive for insurance telematics, Consumers and UBI: The power of value-added services and, Telematics and UBI: How to increase consumer acceptance.)
For example, in March, Washington State enacted House Bill 2361, legislation that lets insurance companies protect the algorithms used to calculate risk based on driving style, or PHYD. Progressive reportedly pushed for this. (The company declined to comment for this story.)
Insurance commissioners are not unfriendly to insurance telematics. Says Eric Nordman, director of regulatory services and CIPR for the National Association of Insurance Commissioners (NAIC), "We view telematics as the next evolution of risk classification and as being perhaps more accurate. It has the potential of recording information at a very detailed level. However, insurance regulators and legislators look at telematics as just one more tool in the toolbox. They look at it more holistically, where a vendor might have a narrower view."
Telematics companies aiming for a national US reach should temper their emphasis on value-added services and instead craft a message that emphasizes how their offerings fit into the current regulatory and conceptual framework regarding insurance risk calculations.
Mileage-tracking telematics solutions, for example, are an easy fit, because all US states already allow at least driver-reported mileage to be used in setting rates. So vendors need to position their offerings within this view, emphasizing improved accuracy in this rating factor while downplaying some of the more innovative ways this info could be used.
As Nordman says, "We view the use of the technology as simply one more rating factor. Mileage has been used as a rating factor for a long time. With telematics, insurance companies can be more precise about measuring the risk of loss for various groupings."
While the near future may be murky, due to the slow pace of legislation and regulation, insurance telematics is the future. In a new report, Ptolemus Group predicts that globally, in 2020, more than 100 million vehicles will be insured with telematics, generating expected premiums of $60 billion. But that's only if regulators and consumers understand the advantages telematics provides.
Frederic Bruneteau, Ptolemus managing director, says, "Motor insurance has been sold one way for 50 years or more, and people are used to it. Now, a new model is coming. It's great, provided there are the right processes in place so people are comfortable with that. If insurers don't address it very well, there is a risk of consumer backlash."
Susan Kuchinskas is a regular contributor to TU.
For more on insurance telematics, see Special report: Insurance telematics.
For exclusive insurance telematics business analysis and insight, read TU’s Smart Vehicle Technology: The Future of Insurance Telematics report.