Although early attempts at usage-based insurance-such as Progressive's (Mayfield Village, Ohio) Autograph pilot from a few years ago-were scrapped due to the cost and logistics of retrofitting telematics technology to customers' cars, a partnership forged by General Motors (GM, Detroit) subsidiaries OnStar (Troy, Mich.) and GMAC Insurance (Winston Salem, N.C.) may pave the way for more successful telematics initiatives that include auto manufacturers.
As part of their collaboration, OnStar, a provider of an in-vehicle safety and security system that leverages global positioning system (GPS) technology, and GMAC have commenced a three-month usage-based insurance pilot in Indiana that is expected to save policyholders up to 40 percent, relates Tim Hogan, director, GM customer marketing. GMAC also is awaiting approval on filed rates so it can conduct the pilot in two other states.
"We are hoping to test acceptance and work out any kinks in the filing process before rolling out the system to additional states," relates Hogan, who doesn't anticipate logistical problems associated with telematic installation or customer acceptance of the system. As part of its collaboration, GMAC Insurance will create two basic insurance products for users of OnStar's in-vehicle safety and security systems, which have the ability to track the number of miles traveled by users.
Reason for Confidence
The carrier has good reason to be confident. That's because GMAC's new insurance products will only be marketed to existing users of the OnStar system, which, according to spokesperson Jim Kobus, can only been installed during a car's assembly process. "From a privacy standpoint it's a lot simpler because these people have already installed OnStar," stresses GMAC's Hogan. "Also, we are not asking them to make a huge investment."
Additionally, as a subsidiary of GM, "[GMAC] is in a unique position," explains Boyd Pederson, manager, Boston Consulting Group (Boston). "Auto companies control a unique moment for insureds. When a car is purchased every three or four years or so, consumers need to price insurance," says Pederson. "The benefit of a company like GM, Ford or BMW is that they are there when a customer has a moment of need." However, Pederson warns, "There is still no proof that the GMAC model will work yet."
The plan does, however, steer clear of the potholes that made Progressive's usage-based insurance unfeasible. Progressive spokesperson Leslie Kolleda says that the costs and logistical challenges of retrofitting vehicles with GPS and cellular technologies led to the carrier's decision to end its Autograph pilot. According to Boston Consulting's Pederson, Progressive probably "couldn't sufficiently differentiate risk to the point where it created revenue that could offset the costs of the program."
Still, the carrier's innovative pilot wasn't a total bust. The insurer obtained two patents for the method that it used to determine auto insurance pricing based on usage. Unlike GMAC's pilot, which only takes miles driven into consideration, Progressive's program featured a more dynamic underwriting scheme. The Autograph program recorded how much driving took place, when it took place and the areas through which participants drove. This information was used to supplement traditional rating, including information about the vehicle and driver, says Kolleda.
Although Progressive's method was accurate, its dynamic paradigm for predicting a policyholder's propensity for loss might have left policyholders fearing that "Big Brother" was watching their every move. Because users of OnStar have already opted for use of the system that tracks their positioning, and given that GMAC is only authorized to collect information pertaining to the number of miles driven, user privacy concerns should be lessened.