Viewpoint: Is there a future for usage-based insurance?
Roger Lanctot, Associate Director, Strategy Analytics, on why comprehensive affinity programs are needed to make UBI mainstream
2012 will be remembered as the year of usage-based insurance (UBI). But in retrospect, it is a lot of sound and fury signifying nothing. Is usage-based insurance the silver bullet to simultaneously reduce traffic congestion, carbon emissions and highway fatalities?
The ultimate objective of UBI programs is to modify driving behavior or reward existing good driving behavior. (Yes, I know, insurance companies are looking to reduce churn by rewarding their best customers and stealing their competitors' best customers, but let's look at it from the consumer's perspective.) Some progress was made in 2012, but there is ample room for improvement in the area of on-board/embedded systems, OBDII plug-ins, aftermarket systems and smartphone apps. (For more on UBI, see Industry insight: Insurance telematics.)
So where do we stand at the outset of 2013?
First, it is important to understand the key objectives of driver behavior modification: increased safety, reduced emissions, increased fuel efficiency and lower insurance premiums.
Adjusting driving styles
I start the year off in a new 2013 BMW 3 Series with a remarkably distracting BMW Apps iPhone integration (not reviewed here). In trading up from my 2011 BMW 3 Series, I have pleased my wife by moving to remote keyless entry, but disappointed her with a car that has no seat warmers, unlike its predecessor. Like its predecessor, it also lacks a backup camera or sensors. (Clearly out of step with the impending US mandate.) (For more on backup cameras, see Telematics: Backing up on backup cameras.)
Still, the new car does come with a turbo-charged four-cylinder engine and start-stop technology, significantly reducing fuel consumption while increasing horsepower. There are multiple sources of feedback around green driving in the car and there is a toggle near the shifter to select driving style—Sport or ECO PRO.
With ECO PRO, the driver can extend the range of the vehicle by adjusting driving style according to cues in the instrument cluster. It is no surprise that a German car company offers such a function since an hour-long drive on the Autobahn can produce dramatically different fuel consumption—and, hence, range—results based on speed.
A system for discouraging speeding in a BMW is a stroke of genius, particularly for me, given the fact that my record of violations spiked following the acquisition of my first BMW. (There is no app, not even Coyote or Trapster, that would have saved me.)
The ECO PRO driving mode introduces a series of instrument cluster symbols and signals making very subtle (it IS a BMW, after all) suggestions primarily based on reducing acceleration. ECO PRO also ties into the operation of climate control systems for maximum fuel savings. The system is even able to calculate and display for the driver the estimated percentage of fuel savings based on the settings selected. The driver can also control the timing and nature of the driving tips offered by the car.
This system can provide a history of fuel consumption, including energy recovery. And, yes, it can also control the rate of cabin heating or cooling and the output of the seat heater, if there were one. Similar systems are available from other carmakers, but I am most familiar with the BMW offering and it is emblematic of an industry trend.
Detailing driving performance
In contrast to this system of buttons, settings, alerts, icons and statistical analysis, my wife’s Toyota Sienna is equipped with an aftermarket Pioneer Aha Radio, which periodically provides an “ECO Graph” of her driving performance. I personally think my wife is something of a lead foot, but she thinks she is performing pretty well in this report.
Unfortunately, the report appears at random intervals and fails to explain what, if anything, my wife is doing well or how she can improve. For her, the driving feedback is simultaneously interesting, intriguing and frustrating. She thinks there should be rewards—anything from gold stars to insurance discounts—associated with her good driving.
There is no doubt that she is correct. Her driving experiences in 2012 included a brief stint testing Progressive Insurance’s SnapShot usage-based insurance OBDII plug in. The device annoyed her with loud beeping during hard braking, but wirelessly delivered a graphical presentation of her driving behavior to a website. (There is a wide range of third-party offerings with website dashboards charting driving behavior and providing driving tips.)
Progressive offers SnapShot in Virginia, where my wife and I live, but after mailing the device back to the company, the insurer never responded with an evaluation or offer of coverage. SnapShot claims customers can save up to 30% in the program. Whether that is actually true or not depends on how much you trust an insurance company. Progressive more or less discourages drivers the company determines will not benefit from the program.
My wife briefly tested another OBDII plug-in from a company called GridLoyalty. Founded by a former Intelligent Mechatronics executive, GridLoyalty promised a range of affinity offers based on driving behavior. Unfortunately, most of the affinity offers were associated with organizations, such as convenience stores, in the Las Vegas area. While the device provided wireless feedback to a Website, a la Progressive, there were no offers in Virginia.
In the year past, insurance companies and their third-party partners crowed about the wonders of usage-based insurance. Even government regulators embraced usage-based insurance as a tool for reducing driving and, therefore, congestion and emissions. Studies show that drivers in UBI programs tend to drive less in general and after joining the programs.
Lackluster consumer response
In spite of the enthusiasm and publicity surrounding UBI programs and more than five years of market availability, there are still fewer than 2.5 million users of these systems around the world. There is good reason for this lackluster consumer response. The programs offer minimal savings and require a significant surrender of privacy.
The daily relevance of an insurance discount is less a benefit than a sword of Damocles swinging over the head of the driver in case that driver deviates from his or her previously safe pattern of driving. What is missing are daily rewards and/or penalties.
MetroMile, an insurance startup, is introducing a pay-per-mile-based offering that the company hopes to expand to other value propositions, such as vehicle service and warranty offers. The MetroMile offer is a step in the right direction, but falls short. What is really missing is a more comprehensive affinity program tying vehicle use to offers and discounts for driving-relevant products and services, such as fuel, parking, restaurants and tolls.
Comprehensive affinity programs
The MetroMile offer is attractive for its simplicity relative to offerings from insurance companies. But what is necessary is for local governments, tolling authorities, roadside franchise operators and such to coalesce around wireless payment systems to enable a more broad-based program of driver rewards and, yes, penalties; i.e., drive less, save more.
Carmakers, such as BMW, are already delivering on in-vehicle systems designed to modify driving behavior. The next step is actually rewarding that good behavior with more than just insurance discounts based on intrusive tracking systems.
A free cup of coffee, tank of gas, parking space, hamburger or oil change ought to be enough to convince nearly any driver to be willing to share their location information and vehicle data. Though distracting, BMW Apps does provide smartphone-based vehicle information feedback while also enabling some limited remote operation of the vehicle, illustrating the fact that there is a role for the smartphone in this new value proposition.
And what about traffic management authorities able to reward drivers—from specific neighborhoods and/or on short notice via smartphone apps or other alerts!—for NOT driving on days when high levels of congestion or pollution are anticipated? Or maybe specific drivers are granted HOV lane access or other driving privileges on demand or for a particular time of day, or for a premium as in the Washington, DC area. There are clear opportunities for public-private collaboration and/or direct consumer engagement.
Is there a future for usage-based insurance? Yes, there will always be consumers who will do anything for a discount of any kind. But usage-based insurance is likely to remain a niche application for the foreseeable future. That niche role will be a disappointment to governments hoping for UBI programs to provide a market-based means for reducing emissions and traffic.
But if carmakers are able to build more effective affinity programs, then UBI programs will benefit from the expansion of vehicle data sharing. The question is, Which marketing partners and OEMs will lead the way in 2013 and what will these programs look like? And, finally, is it possible to retrofit a 2013 3 Series with seat warmers?
Roger Lanctot is Associate Director at Strategy Analytics. This article originally appeared on the Strategy Analytics website.
For more from Roger Lanctot, see Strategy Analytics: “Brazil is one of the fastest growing [telematics] markets”.
For more on insurance telematics, see Industry insight: Insurance telematics.
For the latest on UBI, check out Insurance Telematics Europe 2013 on May 8-9 in London.
Coming up: V2X for Auto Safety and Mobility Europe 2013 on February 20-21 in Frankfurt, Telematics for Fleet Management Europe 2013 on March 19-20 in Amsterdam, Telematics India and South Asia 2013 on April 16-17 in India, Telematics Russia 2013 on May 14-15 in Moscow, Telematics Detroit 2013 on June 5-6 and Content & Apps for Automotive Europe 2013 on June 17-21.
For exclusive telematics business analysis and insight, check out TU’s reports: In-Vehicle Smartphone Integration Report, Human Machine Interface Technologies and Smart Vehicle Technology: The Future of Insurance Telematics.