Most people agree that the Internet of Things (IoT) is exciting, but we still have huge obstacles to clear. These obstacles include how to manage consumer privacy; cybersecurity; and the proficiency of inter-device communication. However, today, I’m not going to talk about any of those hot issues. Instead, I’m going to talk about another massive barrier: The cost of device and sensor management.
Case in Point: In a blog for Insurance Networking News, Matt Manzella says, “As with most new technologies, the cost of individual sensors is still relatively high, but what makes the cost of the smart home beyond most people’s reach is, to truly have a connected home, one requires a large number and variety of sensors. These may include the following sensors: open/close, motion, cameras, outlets/plugs or switches, water/humidity, temperature, smoke, and may also include things like smart appliances and water shut off valves. A minimal set up could be accomplished for $300-$400, but full coverage in a modest sized home could run $1,000-$3,000.”
Manzella is referring to the cost of sensors for each individual homeowner. But take that a step further. What is the cost of those sensors for each of the companies supplying them?
For those who manufacture connected products, device cost is expected to decline dramatically in the coming years and standardization occurs. However, for service industries that need to be connected without having a manufactured product (think insurance) the cost goes far beyond the physical cost of the sensor. This hardware also has to be procured, inventoried and shipped. And, there’s a wastage cost for sensors that are shipped and lost, or never actually installed by the recipient. At least that was the case for auto insurers that deployed hardware-based UBI rollouts.
In a 2014 Insurance Journal article, written by the Casualty Actuarial Society, Jim Weiss of FCAS shared a hypothetical example in which the UBI dongle cost $100 with a shelf life of three years. In addition, it communicates with the insurer via wireless which costs about $5 a month. He concluded that in this scenario, the insured’s loss ratio would have to drop by 22 percent to justify a permanently installed dongle.
It’s easy to see how hardware can inflate the cost of a usage based insurance rollout and complicate the task of achieving a return on investment. And, that’s just the beginning of the process. At some point, sensors will need to be updated or replaced. To save money, some insurers have considered giving UBI hardware devices to policyholders for only six months at a time, but there are still shipping and inventory issues – not to mention inconvenience to policyholders.
One thing is for sure: Mobile devices are easier to manage than hardware sensors.
Easier management, program scalability, and lower costs are just a few of the reasons that usage based insurance pioneers are making the move to smartphone-based UBI platforms. By delivering usage based insurance via a smartphone app + cloud, insurers can avoid all the hardware hassles. They can deliver usage based insurance instantly by sending the policyholder a link to the insurer-branded downloadable app. And, they can universally update their programs by releasing a new version of the app – without having to manage individual sensors.
There’s some interesting new research out from UK-based auto insurer, ingenie. Their Young Driver’s Report revealed that 40 percent of new driver crashes could be avoided with wider adoption of “blackbox” or usage based insurance.
While the infographic below fully illustrates the company’s findings, here are a few highlights:
One in five young drivers crash within their first six months on the road.
More than 90% of those using usage based insurance, engage with driving behavior feedback and check their feedback 14 times a month, on average.
Young drivers who share driving feedback with their parents or guardians are 28% less likely to crash than those who don’t.
Drivers with higher driving scores are less likely to have serious crashes than those with lower scores.
With ingenie’s usage based insurance program, one in eight drivers crash within their first six months on the road (compared to the usual one in five).
It makes sense that coaching teen drivers should improve their safety and ability to avoid accidents, and now ingenie has the numbers to prove it! In addition, we know that young drivers are digitally engaged, and therefore highly likely to embrace smartphone UBI.
American auto insurers – now is the time to take action. If you haven’t already done so, read this article on how to feed the usage based insurance elephant.
A California startup recently introduced another model for auto insurance: pay-per-mile. This new company, Metromile, has a simple value proposition: The less you drive, the more you save. Unlike traditional car insurance premiums, their monthly “base rate” is calculated by miles per month. And unlike usage-based insurance (UBI), the company isn’t looking at driving behavior.
Who benefits … and who doesn’t?
For those who don’t drive a lot, the pay-per-mile model may produce lower rates, saving customers up to $500 per year, Metromile said. While Metromile won’t charge customers for more than 150 miles per day (250 in Washington), it’s an ominous price structure for drivers who are on the road frequently. Auto News put it this way: “Because of the industry’s risk-pooling practices, the break-even point is around 10,000 miles per year. Drive more than that … and conventional insurance would probably be cheaper.” According to Metromile’s website, per-mile insurance is currently only available in California, Oregon, Washington and Illinois.
How does pay-per-mile compare to usage based insurance?
Like usage based insurance, the pay-per-mile model could be an auto insurance game changer. Metromile CEO Dan Preston says, “70 percent of the variation in insurance claims filed can be chalked up to how much customers drive, with just 30 percent tied to driving habits.” With that stat in mind, pay-per-mile seems logical for certain segments of the market.
That said, Metromile operates much like first generation usage based insurance solutions, relying on an onboard diagnostic device known as a Metronome for data collection. Those of us who have watched the evolution of usage based insurance know firsthand that hardware is expensive and cumbersome, making it difficult to cost-effectively roll out and scale a program. The use of hardware creates inherent inventory, storage and distribution challenges – all expensive. Furthermore, there’s the chance that those who receive the hardware never actually install it, creating a separate issue of wastage.
Pay-per-mile innovators may be well-served to follow the lead of usage based insurance, and try a smartphone-based platform to track miles instead.
Different strokes for different folks
While a certain segment of the market will appreciate the simplicity of the pay-per-mile approach, others may be looking for more. For example, usage based insurance may continue to be a more attractive option for the following audiences:
Those who drive a lot, drive safely, and want to be rewarded for their skill. No explanation needed here. If you drive a lot, and drive well, UBI is likely a more advantageous option.
Millennials. On one hand, Metromile says their approach appeals to millennials, because younger customers drive less, relying on alternative modes of transportation. On the other hand, it lumps people together, which isn’t exactly the approach that Millennials covet. IA Magazine describes the millennial mindset this way: “Millennials have grown up in a world of individuality: I am unique, I am different, there’s nobody like me in the whole world. I have control of my life, I’m self-reliant, I get to make decisions – don’t tell me what to do.” Conversely, usage based insurance treats each customer as unique, offering millennials the opportunity to prove themselves on their own merits.
Those who value relationships. As we said earlier, to gain long-term customers, you’ve got to build long-term relationships. Usage based insurance provides insurers opportunities to communicate positively with customers every time they drive – rather than making their only points of interaction the “potentially negative touch points” of “claims or billing.”
At the end of the day, both pay-per-mile insurance and usage based insurance have value. It really comes down to the audience you intend to serve, and your ability to cost-effectively introduce and scale the program.
It’s easy to assume that pretty much everyone has a bank account. After all, it kind of boggles the mind, imagining what it would be like to get by without one.
Still, 10 percent of America is “unbanked” meaning that they are individuals who don’t use banks at all. In addition, another 17 percent are considered underbanked, which means, according to PBS, that “they use a bank account in addition to an alternative financial service like payday lenders or payroll cards.”
A marginal slice of the population? Not really: we’re talking 27% of the nation.
To make things more interesting, those un- and underbanked individuals are smartphone users.
Among the unbanked, 70 percent use smartphones
Among the underbanked, 40 percent use smartphones
Occasionally these bank-averse individuals do open an account, and when they do, statistics show they have an overwhelming preference for mobile banking. That’s true among regardless of income level. And while later they may choose to close the bank account, the phone remains an important fixture in their lives. Bank accounts may come and go, but smartphones are forever.
Does usage based insurance appeal to the unbanked?
If you’ve never opened a bank account, you probably don’t have a credit score. And when you don’t have a credit score, it’s tough to get car insurance. Some insurers may shut the door on you entirely. Others may require you to pay higher premiums. Here’s where UBI could present an interesting solution.
Anyone who’s already using a personal device on a daily basis is probably willing to consider getting auto insurance via a smartphone app. The un- and underbanked demographic, in particular, is even more likely, given their preference for mobile banking.
Usage based insurance eliminates the need for insurers to factor in a driver’s credit score when setting their rates. By basing the cost of insurance on a driver’s behavior, usage based insurance sidesteps the need for credit data.
This means that providers who offer UBI-based insurance without requiring credit data have a competitive advantage when appealing to un- and underbanked customers, because they can offer them more competitive rates. That’s a significant advantage as we’re talking about 27 percent of the population.
This is just one more way usage based insurance could transform the face of car insurance. Click here to see how usage based insurance could revolutionize your approach to insurance.
Last week, California District Attorney Offices in 22 counties filed 171 felony and 28 misdemeanor charges against 187 people for alleged auto fraud involving 40 insurance companies. While these numbers are staggering, the truth is that 49 other states could probably do the same.
Insurance fraud is becoming more of a norm than an exception, particularly in the wake of a shaky economy. In fact, 24% of those polled by the Insurance Research Council said that it’s acceptable to pad an insurance claim to make up for a deductible and 18% said that it’s OK to pad a claim to make up for premiums paid in the past!
In auto insurance, fraud involves several little white lies, including:
Falsifying the garaging address
Underestimating annual miles driven
Omitting some drivers in the household
Overstating the extent of damages when filing claims
Fudging when and how an accident occurred
Forgetting to report changes that may impact applied discounts
According to a 2010 report by Quality Planning, premium leakage cost auto insurers $15.9 billion in 2008. Breaking down the total, vehicle rating factors including annual mileage and rated territory accounted for $6.5 billion in lost premium, while driver rating factors such as unrated operators, accounted for $8.9 billion.
Fortunately, through smartphone-based UBI, auto insurers finally have a way to deter and detect fraud, and to recapture a portion of the dollars lost to premium leakage.
First and foremost, usage based insurance has a built-in deterrence factor. Those who are more prone to fraudulent activity are least likely to sign up. Therefore, the quality of your policyholder pool naturally improves as a byproduct of UBI.
False garaging addresses are easy to detect thanks to the GPS element of a smartphone UBI platform.
Annual mileage driven becomes a non-issue because the usage based insurance app periodically communicates with the vehicle’s odometer.
Certain smartphone UBI apps develop driver signatures over time and are able to detect when other people are driving by comparing current driving behavior to the normal policyholder driving behavior. This capability could flag the possibility of unreported drivers.
Smartphone UBI apps also detect hard braking and sharp cornering events, as well as a vehicle’s geographical location at any given time. This data could be used to corroborate a policyholder’s claim. For example, if a policyholder says a tree limb hit his car in his driveway at 9:09 p.m., but the UBI data shows that the car had a hard braking event that occurred 22 miles away from home at 9:09 p.m. on the date of the reported damage, further investigation may be warranted.
One more consideration in your UBI ROI formula –
Isn’t it time to take a tougher stance on fraud? As you calculate the potential costs and returns of usage based insurance, make sure to include the potential impact of fraud reduction in your equation. That figure could be just as important as the new market share you plan to attract.
2014 represents the best of times and the worst of times in the auto insurance industry. Financial results continue to be strong. Rates are trending up and P/C insurers’ net income rose modestly in the first half of 2014 according to Verisk Analytics.
No pain, no gain?
However, as the old saying goes, where there is no pain, there is often no gain. Is it possible that auto insurers are too comfortable to venture forward into territories not yet conquered?
It certainly seems that way from the usage based insurance perspective. Collectively, the industry seems to embrace the concept of usage based insurance. The industry also agrees that usage based insurance has the potential to be the next big market disrupter – akin to the change brought about by the introduction of credit scores as a rating factor back in the 90s. There also seems to be great buy-in to the concept of smartphone UBI – particularly since two major industry leaders announced smartphone UBI programs/intentions.
The only ingredient that seems to be lacking is forward momentum. This may be the worst of times in the auto insurance industry because many insurers lack any incentive to innovate.
Is a “wait and see” attitude prudent or foolishly tentative? Who will emerge the winners: The market leaders or the market followers?
Study finds early adopters grow faster.
According to a 2014 Harvard Business Review study, “The Digital Dividend, First-Mover Advantage,” there is a correlation between the early adoption of new technologies and better business outcomes. The study found that Pioneers (the 34% of the market who seek to gain first-mover advantage) are growing faster than other companies. Twenty percent of Pioneers have experienced more than 30 percent growth – twice that of those in the Follower category and three times that of those in the Cautious category. Those in the Cautious category were most likely to report no growth.
Interestingly, 54 percent of Pioneers report that their core strategy has changed due to changes in technology and 52 percent have changed their product/service offerings due to changes in technology.
Forty-six percent of financial services organizations in the Follower category cited “legacy technology getting in the way” as the biggest resistance to change.
How does early adoption translate to auto insurance?
To answer this question, it’s helpful to travel back in time to the mid-90s when credit-based rating made its foray into the auto insurance industry. What happened to the early adopters? Eighteen years later, at least one early adopter is now one of the top five largest auto insurers.
If you’d like to accelerate growth, it might be time to move from the back seat to the driver’s seat and become a leader rather than a follower. When you’re ready to do so, we are ready to help.
For those of you who weren’t able to participate, Insurance Telematics Update 2014 offered a spectacular opportunity to network and get the latest usage based insurance industry developments. Held in Chicago on September 3-4, the event delivered a glimpse into the future of auto insurance.
The tone this year was different than that of 2013. While last year, smartphone UBI was something interesting to consider, this year, it had a strong foothold in the strategies of most insurance executives. Why the change?
Perhaps these executives are following the leadership of Allstate and others – pioneering auto insurers that have already announced intent and/or projects using smartphone telematics.
Possibly, it’s that usage based insurance feels much more accessible to auto insurers of all sizes now that industry leaders have veered away from their history of using only proprietary technology.
Maybe, changing perceptions can be attributed to the evolution of smartphone UBI and the fact that several reputable companies (Deloitte, Agero, Cognizant) have improved smartphone UBI apps to enhance the consumer experience. Many second and third generation smartphone apps have already eliminated battery drain and the need for start/stop buttons. And the most evolved are able to merge data collected in the car with power of cloud analytics for more accurate event interpretation.
Most importantly, many insurers are investing great thought into how to use a smartphone telematics platform to revolutionize the insurance business model, connect with policyholders on a daily basis, coach them to improve driving behavior and interact positively and proactively. In a word: They crave customer-centricity and suspect that mobile telematics can take them there at the price they can afford and a timeline they can fathom. Insurers want to offer compelling driver portals, driver coaching and tips, gamification, social sharing, performance benchmarking, weather and traffic alerts, and even roadside assistance capabilities – all while collecting reliable UBI data.
It seemed that insurers have moved past the question of whether usage based insurance is a good idea. They mostly agree that it is the way of the future – perhaps a whole new model for connected consumer engagement – crucial in a digital economy.
They’ve also moved past the debate of whether smartphone UBI platforms can be trusted. If smartphone telematics is reliable enough for industry leaders, others are willing to jump on the bandwagon too. In fact, I spoke with several executives who said they knew for sure that their programs would not involve OBDs due to the added expense and consumer inconvenience. They fully intend to implement smartphone UBI platforms. After all, the smartphone platform is the only choice that can facilitate the customer-centricity they desire in their future business models.
So, it seems that the only question that remains for most is: WHO is the right partner?
There’s no question that usage based insurance poised for industry disruption. How soon will it happen? How long will it take for drivers to full engage with their insurers’ smartphone UBI programs? Only time will tell. For another perspective on the show and the future of usage based insurance, read this post.
According to a recent Towers Watson survey, there are almost twice as many people using usage based insurance (UBI) today as there were just 17 months ago.
In February 2013, the number of consumers that had tried UBI was 4.5%. This July, it’s up to 8.5%. So what else do we know about consumer opinion on usage based insurance?
The Survey Speaks: 3 Takeaways
Even consumers who haven’t tried UBI yet are interested. Of the 1,000 people who responded, the majority (79%) said they were ready to take the plunge with usage based insurance – and if not quite ready, they were certainly open to the idea.
When asked how their answer might change if they knew for a fact that UBI would not raise their current premium, that number – 79% – quickly spiked to 88%.
They’re less concerned than they used to be about privacy. Only 35% of consumers surveyed said they were still worried about UBI and privacy, down from 42% last year.
Their biggest concern now: will it cost more, or less? While concerns about privacy fade, your customers do need some reassurance regarding cost. Almost half of those surveyed (48%) worry that the usage based insurance model would end up raising their bill.
When that concern is alleviated, however, enthusiasm returns.
There’s an easy answer to this. Offer UBI-related discounts only – never UBI-related penalties – and watch your customers respond.
Usage based insurance is on the rise… are you ready?
In every single one of the fifty states, there are at least four personal UBI programs up and running. As the usage based insurance model continues to gain traction into the mainstream, it stands to become not just an alternative, but a fundamental option that your customers expect to be able to choose if they wish.
How do smartphones impact this picture? Among those who already own a smartphone, the number of respondents willing to try smartphone-based UBI is an impressive 80%.
Smartphone UBI is easier for consumers as well as insurance providers, as there’s no under-dash installation and no upfront equipment costs. Smartphones also deliver an excellent user experience, one which customers are very comfortable with. Apps are fun, they add convenience, and they’re already a daily part of people’s lives.
Talk to us about developing a smartphone UBI program that works for your company: Click here to see how it works.
Personal auto insurance fraud is a problem. According to Verisk Analytics, it’s a problem on the rise. Between 2008 and 2011, the National Insurance Crime Bureau saw a 34% increase in questionable claims.
It’s also an expensive problem. Industry estimates show that soft fraud accounts for “about 10% of paid losses and loss adjustment expenses a year.” In 2011 alone, the total amounted to well over $13 billion.
The problem, it seems, is that many Americans don’t consider small mistruths to be fraud. They seem to think it’s OK to slightly change the facts if it saves them money!
Take false garaging addresses and mileage estimates, for example
One of the most common types of soft fraud, lying about where the car is garaged to receive auto insurance rates for a more affordable zip code, has traditionally been a tricky one to track. But with the data that smartphone UBI apps are designed to collect, and it’s much easier to compare the reported garaging address to the actual garaging address. The same is true regarding the estimation of annual mileage.
While these untruths may seem harmless, they add up to big profit loss. In fact, insurancefraud.org reports that premium rating errors account for nearly 10 percent of the $161.7 billion in personal auto premiums written. They found that drivers are five times more likely to report midterm mileage changes that reduce premiums than they are to report changes that may increase premiums. The website quotes a 2010 Quality Planning Corporation study that found that vehicle-garaging rating errors account for more than $2 billion in annual premium leakage.
How to step up your soft fraud defense
Verisk puts it this way:
“Basically, carriers need to step up their game in a big way. They’ve made large investments deploying technology and data to improve the customer and agent experience. But they’re falling behind in the race to identify fraud and rate evasion – a race they can’t afford to lose.”
While most auto insurers think of usage based insurance as a strategy to improve customer attraction, retention, pricing and loss ratios, it might be time to expand UBI thinking to include the objective of fraud deterrence. When you add in the potential savings of eliminating even 10 percent of premium leakage due to auto insurance soft fraud, the usage based insurance ROI formula becomes even more compelling.
If you want to talk buying power, let’s talk millennials.
Born in the last 20 years of the twentieth century, millennials (a.k.a. Gen Y) represent 79 million people. Many are still in school, but make no mistake: already, they wield $170 billion annually. And that number is sure to rise. By 2020, a comScore white paper predicts, they’ll have a hand in a whopping 30% of all retail purchases.
Call them the most important audience to engage for your future growth, and you won’t be exaggerating.
So how to engage them?
First step, understand what’s driving them. Millennials are tech-addicts. Early adopters. The mobile generation. They’ve cut their teeth during the digital revolution, and as a result, they rely on connected devices like a fish relies on water.
For example, take a look at this marketing survey by Rosetta. It shows that 68% of millennials check email hourly, calling their mobile phone “the centerpiece of their life.” Pew Research backs that up, saying 80% of people aged 18–34 own a smartphone.
Apps play a starring role in this picture. Millennials use apps for shopping, gaming, entertainment, social networking – and they don’t just use them. They love them.
Smartphone UBI + Millennials
Our experience with usage based insurance has convinced us that smartphones are the next logical step in the innovation of PHYD insurance. And for millennials, it’s a match made in heaven.
When choosing apps, millennials select for convenience and functionality. They’re “achievement-oriented, tech-savvy, team players, family-oriented” (source).
Smartphone UBI encapsulates the same: it’s a highly-functional technical innovation with the potential to turn road safety into a goal-oriented game, encouraging drivers to compete against one another for safety … creating an incentive that appeals both to team players and the family-minded.
The possibility of gamification spells big opportunity when marketing to millennials, but even without that element, the technology alone ties together many important qualities that drive the millennial mindset.
“They don’t just want an online map, a restaurant app, or a game… they want the best version of these apps that are different, better, cooler, more creative, and more personalized than anything else they’ve used before” (source).
While some drivers have expressed concern about UBI and privacy, that doesn’t hold as much water for millennials, who are “less concerned about privacy than older generations” (source).
Moreover, and this is important, millennials want to stay in touch with you through a variety of media. They actually “prefer a combination of email, search promotions and social networks when interacting with companies and brands” (source).
In other words, they’re looking for a multi-faceted connection to you and your services. Integrating the smartphone into that picture is a smart move.
Learn more about how smartphone UBI works for your business. Click here.