On the Road Again

Norwich Union is driving competition in the U.K. with the launch of usage-based auto insurance policies.

After running a two-year pilot in the U.K., Norwich Union (Norwich, U.K.), part of Aviva (London; US$494 billion in total assets) is launching "Pay As You Drive" usage-based auto insurance policies in the U.K. The program applies GPS-based navigation and predictive analytics to the underwriting process to personalize premiums to drivers based on the miles, time, behavior and locations driven, according to Erik Nelson, a spokesperson for Norwich Union.

"It is a fair way of pricing motor insurance and assessing the cost of premiums," says Nelson. "Young drivers have been able to save anywhere from 30 to 50 percent on a premium."

Nelson says the pilot took two years because the insurer had to gather enough information to assess what risks to measure when underwriting a Pay As You Drive policy. "This year we reached a point where we had enough data from an underwriting point of view, and felt confident that the information was accurate enough to release," he explains.

Norwich Union uses Traffic Master's (Bedfordshire, U.K.) GPS system and telematics box to record where the vehicle has journeyed, miles driven and the driver's behavior. The data then is encrypted and transmitted through a cellular component in the box to the carrier, where it is stored in a Teradata (Dayton, Ohio) data warehouse. Customers receive usage-based billing statements.

Norwich Union and analysts believe the personalized policy will drive competition for a formerly commoditized product. Pay As You Drive "potentially is a win-win for both the customers and the insurer," says Craig Weber, senior analyst at Celent (Boston). "Customers can pay less if they drive less, and insurers can more accurately gauge risk." Norwich Union's pilot, which began with 5,000 drivers in 2004, already has experienced significant growth, and the carrier predicts it will install 100,000 telematic boxes by the end of 2006.

Privacy Concerns

According to Matt Macauley, research associate from TowerGroup (Needham, Mass.), overcoming consumer privacy fears may be the greatest challenge Norwich Union faces with the Pay As You Drive program, which is based on technology used in Progressive Insurance's (Mayfield Village, Ohio; $14 billion in annual premium) discontinued Autograph usage-based auto insurance program in the U.S. "Consumers will have to give up a certain amount of privacy," Macauley contends.

But Norwich Union's Nelson suggests that U.K. drivers are not as concerned about privacy as U.S. drivers since, unlike in the U.S., the U.K. government cannot sequester information from businesses for legal purposes.