Consumer Comfort, Less Costly Technology and Better Pricing Models Lead Stronger Push Toward Pay-As-You-Drive

Auto insurance companies have been exploring the potential for usage-based insurance since before the turn of the century. Now, obstacles such as technology cost and consumers' reticence to allow a device to track them are melting away, and insurers that have been along for the ride from the start are reaping the benefits.

Progressive (Mayfield Village, Ohio) has been actively developing a telematics device since the 1990s, says the company's GM of usage-based insurance, Richard Hutchinson. Bucking the common view of "black boxes," the experimentation and commitment to the model at Progressive has allowed the company to come out with a device for its Snapshot program that fits in the palm of your hand.

"In the 90s, it was multiple devices using satellite telemetry. It worked but it was very expensive," Hutchinson recalls. "Then there was a version that used the online diagnostic port of a computer, it logged driving data coming through the computer of the car. Now, it's a phone chip and uses the existing [cellular] server network."

Snapshot has been available nationwide for several weeks, and Progressive is promoting it in ads featuring its "Flo" spokesperson. Getting to this point required close attention to the design of the usage-based insurance product itself. Concerns over location tracking led the company to build a device without GPS, for example.

"If you say, 'I want this variable,' but the consumer won't accept it, what are you gaining?" he explains. "There's other elements you have to consider: how predictive a data point is, simplicity vs. complex in terms of managing data, for example."

Progressive has built a model based around miles driven, frequency of trips, time of day the car is used, braking and acceleration. Hutchinson says the carrier found these points "vastly" more predictive than location data. But developing the data management and minding capabilities to make this discovery presents another hurdle for insurers.

"From an IT standpoint this is not just another normal product," Hutchinson says. "It's a lot more data than the industry is used to." That's also been the experience of Dan Kraft, director of product innovation for Allstate, who works on the Northbrook, Ill.-based company's Drive Wise usage-based offering.

"There's all sorts of back-end processing that has to make place," Kraft says "There's analytics, how you move the data into your rating system. It's a multifaceted program development project."

Though Allstate, like Progressive, uses a cellular-connected device to gather non-location data, the company is open to other ways to collect the data as the sector gets more refined, Kraft adds.

"Today, the proprietary device has the greatest opportunity in the market, but it may not stay as the platform of choice — consumers will be the ultimate judge," he explains. "The car manufacturers, over time, will have embedded telematics technology in every vehicle, and there's potential for the smartphone to play in this space as a platform."

Tom Kavanaugh, a director with PricewaterhouseCooper's Diamond Advisory Services who has studied the telematics arena for some time, is one observer who sees potential in mobile devices working for insurers.

"Clearly there's additional challenges that come from the data being pulled from the mobile device, but it helps insurers get past the economic equation — the mobile device is already in everyone's pocket, so you don't have to worry about getting the device to people's cars," he explains. "And, from a penetration standpoint, everyone's already got one."

Kavanaugh echoes Kraft's assertion that auto manufacturers are more apt to add telematics devices to cars as they come off the line, noting the example of Mercedes' M-Brace system.

"The question for the carrier is, can they develop a compelling enough value proposition to get at that data," he adds. "I think ultimately where we're going to see the space evolve to is more of an open technology platform."

SMA Strategy Meets Action analyst Mark Breading also sees manufacturer adoption of a standard telematics technology platform driving further take-up of usage-based insurance in the next few years. ("Why should every insurance company work with some manufacturer to create a black box?" he asks.)

But technology-driven adoption isn't going to make pay-as-you-drive successful on its own, he continues. He notes that UK-based Norwich Union, one of the first companies to offer usage-based insurance, recently discontinued its program due to lack of interest.

"What it's going to come down to is the experience," he says. "The whole target market for this is safe, low-mileage drivers. It's reverse-adverse selection."

Nathan Golia is senior editor of Insurance & Technology. He joined the publication in 2010 as associate editor and covers all aspects of the nexus between insurance and information technology, including mobility, distribution, core systems, customer interaction, and risk ... View Full Bio