Financial Services Uneven road ahead: Telematics poised to reshape auto insurance
The broad rollout of Progressive s usage-based auto insurance, SnapShot, will come to be seen as a watershed. Snapshot is the most prominent of numerous insurance programs that use telematics technology that directly monitors driver behavior to improve pricing, promote driver safety, and reduce claims costs. As technology costs fall, privacy concerns recede and regulations become more supportive, telematics is fast moving into the mainstream and will fundamentally disrupt the auto insurance business. The threat to late adopters is real: better drivers will enroll in telematics programs, leaving behind a shrinking pool of poorer risks to the traditional insurers. However, merely launching a telematics product isn t enough: success will require managing significant change across pricing and underwriting, distribution and claims processes. Traditional pricing and underwriting competition in auto insurance has long been a race to better segment the driving population better factors, better algorithms, better targeting to drive positive selection. In the end, however, underwriting factors are a relatively crude measure of a driver s individual risk based primarily on who they are rather than on how much, where and how he or she drives. Usage-based policies take driver segmentation much further by allowing insurers to observe (and establish pricing based on) how much, how and (possibly) where their policyholders drive. The concept has been widely discussed for decades, but it is only since the 1990s that the technology has been available (and only much more recently at acceptable cost) to support sophisticated usage-based policies. Today, over five million in-vehicle telematics devices have been installed in the US, and more than 30% of models are available with installed telematics devices. It is no surprise that many US auto insurers are exploring usage-based insurance business models. These range from basic pay-as-you-drive policies that do not make use of telematics hardware, to fully-fledged telematics operations that use new forms of data not only to set premiums, but also to improve customer segmentation, enhance claim handling, combat fraud and even improve driving (Exhibit 1). 2 Copyright 2011 Oliver Wyman
Exhibit 1: Range of usage-based and telematics-enabled insurance models (simplified) Traditional policies Premiums reflect credit score, vehicle type, gender etc. Some benefits from safer driving after renewal Usage-based policies Telematicsenabled Basic Pay As You Drive Pay-per-use policies, 2-3 pricing brackets Mileage verified using odometer Enhanced Pay As You Drive Mileage verified using telematics (incl. accelerometer data) Other factors may determine price per mile, e.g. road type, time Basic Pay How You Drive Premium adjusted to incorporate manner of driving (accelerometer data) as well as time and (possibly) location Strategic targeting of clients for which telematics is beneficial Increasing sophistication Enhanced Pay How You Drive Premium incorporates data on manner, location and time of driving Driver feedback, claims handling and renewal structures also in place Maximum value extracted from telematics program A number of telematics insurance programs are already on the market. Progressive retains its early lead in the field and is now marketing Snapshot much more broadly, offering premium discounts of up to 30% from 30 days after the installation of an on-board device for drivers in most states. Allstate is piloting a similar program, Drive Wise, in Illinois. Like Snapshot, Drive Wise allows customers to track their driving performance online. GMAC Insurance offers low-mileage discounts for OnStar subscribers in 35 states, and MileMeter offers pay-as-you-drive policies in Texas. On the commercial side, Liberty Mutual (Onboard Advisor), Zurich, Travelers and others are using telematics to help fleet managers reduce maintenance costs, improve vehicle efficiency and obtain premium discounts. Many other insurers, while not having gone to market yet, are developing or piloting new telematics programs. Copyright 2011 Oliver Wyman 3
Improving your road vision: why insurers should care about telematics Insurers derive a range of benefits from telematics. Some of the primary benefits accrue in risk selection and pricing. As safe drivers seek out good-driver discounts from carriers offering pay-how-you-drive telematics programs, other carriers will find themselves insuring shrinking pools of poorer drivers who will appear to be normal drivers using traditional rating factors. One of our European clients observed over 10% lower claims frequency for customers enrolled in a pilot telematics program than for the wider market mostly the result of positive selection. Exhibit 2: Positive selection in telematics portfolios Claim frequency, telematics portfolio vs. market Males by age group Market average Telematics portfolio 18-21 22-25 26-30 31-35 36-45 46-65 66-99 By region Market average Telematics portfolio N1 N2 N3 N4 N5 N6 N7 N8 C1 C2 C3 C4 C5 C6 S1 S2 S3 S4 S5 S6 Source: Oliver Wyman client data (disguised) Carriers with telematics offerings will also have a competitive advantage at renewal time. For example, they can distinguish between safe drivers and reckless drivers who happen not to have had a claim over the preceding 12 months. 4 Copyright 2011 Oliver Wyman
Insurers can use telematics to directly influence how policyholders drive. At a minimum, they benefit from the phenomenon in which merely knowing that a device has been installed leads some drivers to moderate their speed and brake more safely. At the extreme, insurers can actively improve driving habits by providing on-going feedback based on telematics data. American Family, Safeco and 21st Century all have telematics programs aimed at teen drivers. Senior drivers are another group for whom customer feedback loops may be effective. The long-term winners will be the firms that use telematics data not only to price better, but also to optimize their claims management capabilities. Claims improvement opportunities include improving fraud detection, for example by using accelerometer readings to gauge the g-force during impacts and settle whiplash claims more accurately; and reducing the lead time between accidents and first notice of loss, which increases the likelihood of achieving a speedy and fair settlement before the involvement of third parties. Other benefits of telematics for insurers could include: Higher recovery rates for stolen vehicles More effective subrogation Lower LAE through shortened claim cycles and reduced investigation expenses Higher customer retention Additional revenue (e.g. cross-sell, new products, add-on services and devices) There are also wider societal benefits. For example, the Environmental Defense Fund promotes pay-as-you-drive insurance as a way to make roads safer and reduce environmental impact, and California approved pay-as-you-go policies not only for environmental reasons but also to combat road congestion. As the cost of telematics devices continues to fall, the cost/benefit threshold historically high will look increasingly attractive to many carriers. In addition to the cost of installing on-board devices, there are ongoing costs associated with marketing the program, educating customers and agents, and managing and analyzing the data. Allstate policyholders get a 10% discount for enrolling in the Drive Wise pilot, but pay a $10 technology fee per enrolled vehicle per policy term. Snapshot is generally free, although Progressive charges customers a $30 technology fee during each policy term in some states. As auto insurance premiums rise, it will make sense for an increasing number of customers to pay a technology fee to obtain the benefits of telematics insurance programs. Copyright 2011 Oliver Wyman 5
As the extent of adverse selection in the non-telematics segment increases, the cost/benefit tradeoff will only grow starker. Privacy concerns are widely cited as a barrier to the growth of telematics. However, there is evidence that consumers are less worried about privacy than insurance executives believe they are. According to a recent survey 1, more than three quarters of US policyholders would install telematics devices if this might lead to a premium reduction. Privacy concerns should not present an insurmountable barrier. Regulators are generally sympathetic to usage-based insurance. At least fourteen states have included pay-as-you-drive insurance in their climate action plans. New York City s Department of Transportation is looking for ways to promote mileage-based insurance, and the state of Washington has held preliminary hearings on requiring insurers to make mileage-based insurance available by July 2012. 1 LexisNexis poll of 3,472 US residents, of which 3,148 were a representative sample of insured drivers and 324 were drivers with a 16 to 25 year-old dependent on their policy. 6 Copyright 2011 Oliver Wyman
The challenge is to embed telematics across the organization It is not enough simply to launch a telematics policy. To capture the full benefits of telematics, insurers need to put in place a series of organizational enablers across the value chain. Substantial work is required to redesign the pricing and underwriting process. Insurers must consider the impact on their marketing strategies, sales models (e.g. how to explain these policies on-line or via the agency channel, and how to manage device installation and returns), and servicing (e.g. policy cancellations, replacement vehicles). Telematics data can be used to optimize the entire claims process, from investigating and evaluating claims, to detecting fraud and capturing third-party drivers into internal claims handling processes. Exhibit 3: Selected organizational enablers to capture benefits of telematics programs 1 2 3 Product design Customer and pricing acquisition/channel management Claims Customer segmentation Cost/benefit analysis Discounted/free box Expected number of policies Underwriting terms and conditions Regulatory filings Renewal premiums that reflect real driving behavior Enhanced retention targeting Customer lifetime value analysis Training, tools and incentives for agency/ broker channel Online communications Installation network (garages or mobile) Fluid data flow to/from telematics provider Telematics-enabled claims management Data feed integrated into claims systems Training for loss adjusters Telematics protocols for small claims (e.g. whiplash) and fraud Promotion of telematics data in court system Building out the capabilities required to support a telematics program is not easy, and many of the early attempts (globally) have come up against a series of internal and external challenges. Some of the common issues during development and roll-out include: Partial consideration of the operating model: The impact of telematics beyond marketing and pricing should not be overlooked. We have observed early entrants capturing some of the marketrelated benefits quickly, but postponing the investment to capture wider benefits. In Europe, many of our first wave clients are now working on how to fully embed telematics into their claims organization, or use telematics as a retention tool Copyright 2011 Oliver Wyman 7
Timing: It can take up to 18 months to launch a telematics program, with a further 12 months to gather robust underwriting data, but claims handling and fraud detection infrastructure can be put in place more quickly. Efforts to accelerate this timeline are counterproductive given the degree of change required Exhibit 4: Representative telematics launch timeline 1-2 months from start 2-3 months from start 1-3 months from start 2-4 months from start 6 months from start 12 more months for robust underwriting data Market learning and vendor discussions Vendor selection Proposition design and testing Vendor contracting Planning of phased roll-out Redesign of operating model Phased roll-out Preparation for implementation of operating model Full roll-out Gather claims data & incorporate into pricing/underwriting Poor proposition design: While we expect to see demand for telematics programs rising, the business is initially likely to flow to insurers who have taken the time to develop and test propositions with their target customer segments during a phased rollout or pilot program. The right value proposition helps to ensure that the best drivers are captured by the program In-house mentality and weak cost management: Insurers need not incur the substantial costs of buying telematics devices and creating installation networks this infrastructure can be rented. Similarly, the data gathering, cleaning and analytics required to transform driving data into summary statistics can be outsourced. However, suppliers will face capacity constraints: choosing preferred suppliers and locking them in quickly is critical Lack of organizational commitment: We have seen telematics projects driven by the marketing department with little attempt to achieve buy-in from the rest of the business. Natural skepticism and privacy concerns from Legal, Compliance and other stakeholders have derailed or significantly slowed these projects. For example, insurers can help to allay consumers fears by being as transparent as possible, offering a clear quid-pro-quo for sharing vehicle data. They should also seek to minimize the use of GPS data, and should prevent access by third parties, particularly government entities. It is important to achieve buy-in early in order to overcome internal obstacles 8 Copyright 2011 Oliver Wyman
Driving in the passing lane, not parked on the shoulder Telematics programs are moving into the mainstream. As insurers address how to respond to this paradigm shift, they must balance the technical benefits with developing a compelling customer value proposition and putting in place organizational enablers. Some of the key questions they should ask themselves include: Pricing and underwriting: Which client segments should we target, and how? Do we understand telematics data and how to incorporate it into pricing for new and renewal business? Systems: What are the operational and systems barriers to implementing telematics? Can our administration systems and data storage architecture cope with telematics data? Privacy: Can we safeguard privacy and convincingly communicate this to customers while capturing the pricing and claims management benefits of telematics data? Distribution: What additional training and tools do our agents need? How do we market usage-based policies online? Can we handle the installation and collection of telematics devices? Claims: How can telematics data be integrated into our current claims handling processes? What additional tools or training do our adjusters require? Regulatory: Do our policies conform with regulations? Do we have a credible actuarial basis for adjusting our current prices using telematics data? Do our data management protocols meet regulatory requirements? Insurers who can address these issues over the next two to three years will rapidly grow their share of low-risk drivers. Others will be left with the rump of high-risk drivers who can derive little benefit from telematics: on the shoulder, watching the competition pass them by. Copyright 2011 Oliver Wyman 9
Oliver Wyman is a leading management consulting firm that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation, and leadership development. About the authors Thomas Robinson is a Partner in the North America Insurance Practice Kai Talarek is a Partner in the North America Insurance Practice Leo Fransella is a Senior Engagement Manager in the North America Insurance Practice Ofir Eyal is a Senior Engagement Manager in the Europe Insurance Practice For more information please contact the marketing department by email at info-fs@oliverwyman.com or by phone at one of the following locations: North America EMEA Asia Pacific +1 212 541 8100 +44 20 7333 8333 +65 6510 9700