Usage Based Insurance

Usage Based Insurance Saving Money by Helping Modify Driving Behavior Product Code: idrd-14uscwsat-nuse Market: Connected Worlds Destination: U.S. Direction: Automotive Date Created: January 2014 Expert Guide Lavanya Rammohan Sr. Analyst 301.801.5310 (office) lrammohan@compassintelligence.com Contributing Analyst Amy Cravens

Table of Contents Methodology... 3 Introduction... 4 Market Opportunity... 5 Current Initiatives... 6 Intellectual Property (IP) Environment... 7 Market Influencers... 7 Future Expectations for UBI... 8 2013 Compass Intelligence Guiding Business Decisions Page 2

Methodology Sources: Compass Intelligence s segment and market forecasts, which include business expenditures, market demographics, and usage and adoption statistics, are built using multiple sources, including proprietary Compass Intelligence research. These sources include, but are not limited to, secondary research, government data and statistics (e.g. Department of Commerce, Federal Communication Commission, Bureau of Labor Statistics and US Census Bureau), primary research, vendor-based research and in-depth interviews with key decision-makers, where relevant. Compass Intelligence selects data sources to provide the greatest degree of perspective on each market or segment, in addition to the highest level of data accuracy, stability, and consistency over time. Approach: We develop market perspectives and forecasts, such for size-of-business expenditures in certain markets, using a combination of top-down (estimating the total size of the market) and allocation (allocating a total across several segments) methods. Our forecasts are structured to provide a detailed picture of a given market from a segment/directional, such as Size of Business and/or Vertical Industry, perspective. This approach is used to leverage our expertise in these areas and to provide a better basis to benchmark results and correlate them to other markets. Validation: Our forecasts and research are validated in several ways, including by benchmarking final results with relevant outside data sources, where available, particularly, industry and government statistics, and/or with insights for key decision-makers in the industry. Additionally, for directional forecasts by Size of Business or Vertical Industry, results are validated by calculating per-firm and/or peremployee averages and these are compared to outside data on other per- firm/per-employee expenditures, as well as evaluated based on what is known about firms in each segment. 2013 Compass Intelligence Guiding Business Decisions Page 3

Introduction One of the most active areas in the world of M2M communications today is in the automotive space. From the connected car to fleet management, wireless telecommunications is increasingly being used to track cars and their performance. One area of automotive M2M that is receiving a great deal of interest is Usage Based Insurance. Usage Based Insurance (UBI) is a relatively new form of auto insurance that closely aligns driving behaviors with premium rates. It is a departure from traditional insurance in that it establishes pricing based on multiple elements of a driver s behaviors rather than traditional insurance, which tends to be more profile-based. While traditional insurance may account for safe driving behaviors, UBI builds on that foundation but also measures time, distance, place, rapid acceleration, hard breaking, and vehicle type to provide a more holistic picture of the driver s behavior. Usage data is collected from the vehicle s odometer, or in-vehicle telecommunication devices. Information is then transmitted from the vehicle using either radio frequency (RF) or cellular technologies. This type of telematics-based communication is beneficial in that it is more immediate and accurate than other types of usage reporting. While UBI programs have existed for over a decade, the early-stage offerings were significantly more rudimentary in their depth of driver behavior monitoring. Advances in technology have improved the cost and effectiveness of vehicular telematics, which has resulted in a surge in insurance providers usage. With the growth of the UBI market, several variations have emerged, including: Pay-As-You-Drive (PAYD), Pay-How-You-Drive (PHYD), Pay-As-You-Go, and Distance-based Insurance. 2013 Compass Intelligence Guiding Business Decisions Page 4

Number of Connections (Millions) Market Opportunity The UBI market for standalone devices is poised to grow in 2014 and 2015. These devices connect to OBDII ports in vehicles. However, with the evolution of connected cars, such standalone devices are expected to become redundant. This will result in a decline in connections for UBI devices. However, the market for UBI will continue to expand for insurance companies with the availability of applications for connected cars that will enable insurance companies to collect data directly from the vehicle and provide users with premium rates. 7 6 U.S. Automotive M2M: UBI Market Forecast (2012-2018) 140 120 5 4 3 2 1 0 100 80 60 40 20 0 Growth Rate (%) -1 2012 2013 2014 2015 2016 2017 2018 (20) Usage Based Insurance Growth Rate Source: 2014 Compass Intelligence Compass Intelligence believes that the future for UBI is in integration with connected cars and datasharing between car companies and insurance providers. This will lead to a decline in the number of standalone devices for UBI and be integrated into diagnostics systems for connected cars. 2013 Compass Intelligence Guiding Business Decisions Page 5

Current Initiatives As mentioned, although UBI has existed for over a decade as a rudimentary safe-driving monitoring capability, with the improved cost and effectiveness there has been significant growth recently in UBI programs. These programs have emerged through partnerships between insurers, auto manufacturers, and telecommunication equipment providers, and telecommunication service providers. Current initiatives include: Allstate: Drivewise, Allstate s UBI program was launched in December 2010. Based on the initial program success, Allstate commenced an aggressive program rollout in 2012. The program is currently available in twenty-two states (as of September 30, 2013), with twelve of those added in just the past six months. Further the company reported in mid-september one billion miles driven by Drivewise customers since its launch. Drivewise is simple to deploy with the device simply plugging into the on-board diagnostic port. Allstate is partnered with AT&T to support and provide connectivity for the Drivewise telematics devices. Drivewise participants can go online or use a new smartphone app as well to monitor their driving behaviors and view potential performance discounts. Allstate reports that 7 out of 10 drivers save money with Drivewise. Esurance: Esurance, which is an Allstate company, is calling their UBI pilot DriveSense. While yet to implement a full commercial UBI deployment, Esurance has partnered with Sprint for a broad program trial. Launched in July 2012, Esurance was the first to partner with Sprint on their turnkey UBI trial program, coined Integrated Insurance Solutions. The company announced a further partnership in September 2013 with Modus for the use of their telematics solution. As with Allstate s Drivewise, Esurance customers simply plug in a port-based device to begin monitoring. Data is then uploaded over Sprint s wireless network to a cloud-based network where it is analyzed with driver scoring software, from which potential discounts are calculated. The program was launched in Arizona with Texas being included in the trial shortly after launch. Progressive: Among the first to launch a UBI program, Progressive introduced its Pay As You Drive program in March 2011. The company had been developing the program for roughly two decades in response to customer complaints for not being rewarded for safe driving. As with other programs, users plug in a device, which Progressive calls the Snapshot into the onboard diagnostic port. Unlike other onboard diagnostic devices, however, Snapshot is not enabled with GPS, meaning that Progressive is not able to track the vehicle s location. They do, however, monitor the number of miles driven, time of day driven, and how often drivers make sudden stops Progressive, like Allstate, has partnered with AT&T for network support. 2013 Compass Intelligence Guiding Business Decisions Page 6

State Farm: In Q3 2012 State Farm Insurance signed an agreement with Verizon subsidiary Hughes Telematics to launch a UBI program as an expansion of State Farm s Drive Safe & Save initiative. Under the venture, Hughes will accumulate the data, analyze it, and send it to State Farm, who will then adjust the driver s rates accordingly. State Farm expects to introduce the UBI program later this year. It will be voluntary, at least initially, for customers driving OnStar-equipped vehicles from General Motors and Ford s Sync system (State Farm has also run trials using OnStar FMV rearview mirror replacement as a connectivity device). Others can take part by installing Hughes In-Drive tracking device, for which they will pay a monthly fee for the device ranging from $5-15 a month. Intellectual Property (IP) Environment As a leader in UBI and one of the first companies to launch a program, Progressive has been able to secure a strong IP portfolio around their UBI technology. The company holds three patents covering insurance technology, which includes patent number 6,064,970, which covers motor vehicle monitoring system for determining cost of insurance. As one of the few patent holders in the area of UBI, Progressive has strongly defended their IP. Progressive has filed a patent infringement suit against Allstate, Liberty Mutual, Safeco, State Farm, and Hartford, claiming their UBI products infringe on Progressive s patent. Progressive is not the only holder of UBI patents there are roughly 40 different patents that have been issued that potentially cover UBI. For those providers, however, that have not secured IP, it is a potential minefield of problems. Litigation concerns, such as those highlighted, have negatively impacted market growth. One route around the IP problem is through licensing technology. Progressive announced in the end of 2012 that the company would begin licensing their intellectual property to other UBI programs. USAA signed an agreement in June 2013 to be Progressive s first UBI license client. Licensing is emerging as a means for the market to move forward from the quagmire of lawsuits that have slowed progress the last couple of years. Market Influencers Competitive positioning: Currently UBI offers insurers the ability to differentiate their product, but as more providers introduce this offering, UBI will transition from a competitive differentiator to a competitive necessity. Value added products: Insurers are looking for innovative ways to create new revenue centers. Customer retention: By offering a unique product that builds value over time through safe driving, UBI programs improve customer loyalty and reduce turnover. 2013 Compass Intelligence Guiding Business Decisions Page 7

Privacy concerns: While there is a great deal of consumer demand for behavior-based pricing, there are also concerns about privacy infringement. Not having GPS may alleviate privacy concerns, but some UBI subscribers continue to be disturbed by a sense of big brother watching over them. Cost: while the cost of in-vehicle hardware has dropped 75% over the past several years (from $400 to $100), the total price for implementing UBI is costly and may prevent mid-tier providers from offering a UBI product. Future Expectations for UBI While UBI implementation has been challenged (cost, patent litigation), Compass Intelligence believes the market is poised for significant growth. We attribute this optimistic perspective to multiple contributing factors, including: Previous barriers are being remedied: evolution of the market is bringing remedies to many of the more significant barriers to growth such as the cost for onboard monitoring devices has fallen 75% and licensed IP offers an alternative to litigation concerns. Trials are coming to fruition: Most UBI offerings, outside of Progressive and Allstate, have only been on a trial basis, although some being very broad. These trials, having been launched for a year or more, are concluding and Compass Intelligence expects a surge in full commercial offerings following trial conclusions. New products coming to market: Innovative new offerings, such as Modus end-to-end solution simplifying the deployment and management of UBI offerings. The Modus solution employs Axeda s platform, a cloud-based service for connecting to remote OBDII devices, managing driving behavior data, integrating the data, and developing new applications. Transition to Bluetooth: While device communications currently employ a cellular module, Compass Intelligence believes next generation in-vehicle UBI devices will utilize Bluetooth links to a driver s smartphone for data transmission. Not only would this lower hardware costs, but would also link the data being transmitted to the driver s phone, tying behavior to specific individuals, rather than just to the vehicle. 2013 Compass Intelligence Guiding Business Decisions Page 8