The Future of Personal Lines Auto Insurance

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1 Made by Daniel E Weisman of: The Future of Personal Lines Auto Insurance Overview The entrepreneur always searches for change, responds to it, and exploits it as an opportunity. - Peter Drucker The change-resistant personal lines auto insurance industry in the US is about to experience rapid change on multiple fronts. For example: 1 UBI is expected to have 100 million customers by 2020 bringing in $80 billion a year 2 in annual premium. Ridesharing and car-sharing are challenging the fundamentals of insurance. Autonomous driving technologies will put downward pressure on premiums and will eliminate actual drivers in the future. In the midst of all this change is opportunity. Disruptive forces Disruptive technologies typically enable new markets to emerge. - Clayton M. Christensen UBI: Risk modeling innovation UBI is expected to grow to 100 million customers and over $80 billion in premium by True hockey-stick growth. It is our opinion that the figure is underestimated given the exponential nature of disruption and growth. 1 UBI stands for usage based insurance, i.e. insurance priced on how and how much you drive Insurance Telematics Study by Ptolemus

2 Insurers want UBI because it strips out a lot of the volatility from their portfolio. Consequently, it allows them to gain market share and operate profitably in markets that 3 have historically been hard-to-quantify risks. UBI should therefore be considered a disruptive innovation because it will initially compete at fringe market segments and then move mainstream. However, unlike traditional disruptive innovation, the shift to UBI will be accelerated by a positive feedback loop: 1. Drivers who underwrite the costs of other drivers leave for better prices Increasing prices for those remaining in the pool of the traditionally insured Thereby accelerating the price advantages of being a UBI customer This transition will further accelerate due to: An emerging platform shift, Partial traditional product obsolescence, and The technological displacement of revenue. In other words, UBI is the final future of auto insurance until commuting and shipping is completely supplanted with autonomous-driving taxi-style services and drones. Insurers who fail to secure access to data/ UBI customers early will die. Early marketplaces of UBI-grade driver data can develop a network economy. Experts in UBI modeling will be essential to insurers. Experts in customer acquisition will also be essential to insurers. Emerging platform shift 70% of insurers are in some phase of creating a UBI program, but list high cost as their #1 challenge. - Mark Breaking, Strategy Meets Action Right now, the number one challenge in creating UBI programs is: 1. Acquiring the large amounts of data necessary to model, and 2. Turning that data into an actuarial model for UBI. 3 Note that Progressive, in traditional disruptive innovation fashion, started out in the non-standard (i.e. hard-to-quantify-risk) market and used their expertise in profitably serving that market at very competitive prices to move upstream and gain further market share/ profits in the standard market. We will see the same with UBI.

3 Unfortunately, the dominant solution requires installing OBDs (on board devices), which is a customer acquisition nightmare. Convincing people to install OBDs on the promise that they may save money 30 days down the road is a tough sell (just ask Progressive). Fortunately, mobile apps can obtain data that is good enough (even if not preferred) and players like Apple (ios CarPlay), Google (Android Auto), and others (Navdy, Automatic, Blackberry) are driving a future known as the connected car, which will eventually completely supplant traditional OBDs from a superior-quality data collection standpoint, while simultaneously creating a customer acquisition touch point that promises to be much 4 more cost-effective than current advertising models. Mobile and the connected car therefore eliminate the principal barriers to the UBI industry s future (data + customer acquisition) accelerating adoption. Late adopters will be subjected to the long tail of power laws (due to app reviews). Platform owners will wield tremendous control over app exposure/ availability. Chicken and egg problem of needing to have a UBI model before building UBI for the connected car. Early adopters will benefit from power laws. The early aggregator to achieve critical mass will benefit from a network economy. Insurer profits will shift to those with better access to data and those who can better model the data (due to the commoditization of the insurers). Partial product obsolescence due to ridesharing For many reasons, ridesharing is a disruptive technology that will be a growing part of the future of transportation. Insurers hate the ridesharing risk because simply demarcating who is responsible in what circumstances (with fare, w/out fare, or looking for fare) doesn't completely account for the increased risk of being in the TNC "Ridesharing class". To better understand why personal lines insurers have such a hard time with Ridesharing, we need to look at some actuarial science: 1. Routine and familiarity lower risk. For example, people are better drivers in neighborhoods that they're familiar with, which is why California issues restricted drivers' licenses to the elderly for the neighborhood they live in. But, what about a 4 By our estimate, Progressive spent $1,397 per new net (acquisition less attrition) customer in 2011.

4 person who just dropped off a fare in a neighborhood they're not familiar with? Who should eat that risk? 2. Driver fatigue; it's a huge risk. For drivers who work a full day, then look to make a few extra bucks... who should eat that significant additional fatigued driver risk when the driver heads home after putting in a good 2 hours looking for a Rideshare fare? (Note: Being engaged with the fare is of secondary relevance.) A lot of the hostility from insurers and regulators comes from a belief (supported by Rideshare company behavior) that Rideshare companies are trying to pass the liability buck. A lot of the historic intransigence on the part of Rideshare companies (getting better out of necessity) is that the existing regulatory and insurance standards are punitive and inappropriate (and they re right). While local governments are largely handling the new gray zone very well, the only way to make everyone "okay" in the end is to calculate the added risk of being a rideshare driver... which is only possible (in light of the above examples), using statistical analysis layered over 5 a UBI framework that also distinguishes between the Ridesharing vs. not Ridesharing. Traditional insurance is not equipped to handle rideshare risk. Not being able to identify rideshare drivers is dangerous for traditional insurers. Rideshare companies will have many reasons to say no to feeding data for UBI purposes and/or operating as a customer acquisition pipe. Not being able to insure rideshare drivers means losing out on a large portion of the future insurance market and insuring them (wittingly or not) means eating risk. Ridesharing driver data is an excellent data source. Rideshare companies are gatekeepers to many customers (and will grow). Disruption from autonomous driving technologies UBI players will be the only ones to survive the further disruption of autonomous driving vehicle technologies (lane assist, auto-braking, and the Google car). The impact on lower accident frequency and magnitude will depress premiums and further accelerate the shift to UBI, not to mention that UBI will be the only way to reasonably insure these vehicles (as consumers won t want to pay extra premium for the times they re not 5 Note: Rideshare companies may eat the cost after drop off but first it must be calculated, which can only be done via always-on powered UBI. (Thank you Chris.)

5 really driving and insurers with deeper knowledge about how much a driver is manually driving will develop significant advantages from better constructed policies). There is talk about the manufacturers eating the autonomous driving vehicle insurance costs along the lines of livery services and TNCs. However, this is unlikely because Geography has a major impact on accident frequency and magnitude (which is solely in the domain of the vehicle owner) meaning that costs will be passed on to the consumer at a minimum, and 2. The differing expectations regarding liability make corporate policies significantly more expensive. Consequently, policies are likely to become hybrid policies (commercial and personal), which can only be sanely managed as UBI OEMs may facilitate UBI insurance purchases through in-dash aggregators (or through an exclusive relationship). Eventually, autonomous driving technologies will take out ~90% of the revenue from premiums even when there are drivers killing large numbers of auto insurers. Autonomous driving technologies will eventually eliminate all drivers period (in favor of Uber style driverless cabs and shipping delivery drones). Autonomous driving technology companies will power the vehicles of the future. Ridehsaring companies can transition through the disruption. Early adopters (like London) could disrupt ridesharing and build new network economies. OEMs who excel in integrating autonomous driving technologies will sell all of the cars of the future. There will, at minimum, still be usage based commercial UBI insurance policies on these vehicles and companies who lead the transition (data + modeling) will be best able to supply those policies.