Why Car Insurance Has Yet To Be Disrupted

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Car insurance is a ridiculous proposition. Pootle sedately in your car to the shops once a week or floor it ‘round winding country roads, at 3 am, in the pouring rain, talking on your phone after a 16-hour trek with no breaks. Either way it costs you the same.

For decades the car insurance industry, worth $33 billion annually, has talked about “Usage Based Insurance” (UBI), either “Pay As You Drive,” (PAYD) or its more sophisticated cousin, “Pay How You Drive” (PHYD). With the mass introduction of smartphones, equipped with any number of sensors, is UBI finally going to hit the highway? And if so, will it open up this most traditional market to nimble-footed outsiders?

Will technology really change how we insure our cars?

Picture: Auto accident No. 1042 Bloor Street West near Walmer Road by Toronto History. Released under CC4.0

The UK is leading the way, although heavily-focused on the teen market, where premiums for new drivers are eye-watering, says a 2013 report by Paris-based Ptolemus Consulting Group, a firm specialized in telematics, location-based services and mobility. The report records more than 40 active programs in the UK; in Germany just two.

Key Obstacle: Price

UBI has relied on “black box” devices fitted by engineers or self-installed dongles that use the OBD-II port that gives access to the car’s in-built self-diagnostic and reporting capability. Devices have a SIM card and can relay back where, when and how a driver drives.

From a risk point of view UBI works. “Basic, simple, absolute scores we think differentiate by about 2 1/2 times from the best decile of your customers to the worst decile of your customers,” Andy Goldby, Chief Product Officer at Sheffield-based analysts The Floow, told a recent conference in London. “To put that in context for most insurers that’s about the same as your best existing risk factor.

“When you use more advanced scoring, we think we can increase the level of differentiation to 10 to 20 times between your best and worst decile.”

So what is stopping it? One of the key obstacles is price. The growth of price comparison services has opened insurers up to brutal competition. “The insurance industry has done a very good job of promoting consumer behavior which is value destroying for them,” says Jonathan Hewett, Chief Marketing Officer for Octo Telematics, an Italy-based maker of telematics devices. “Consumers are very interested in pricing for products that they have to buy by law, but there has been no innovation around the value proposition in other benefits.”

The UK is among Europe’s more expensive insurance markets, but according to comparison website Moneysupermarket, a 40- to 49-year-old driver will on average pay just £306 (€431) a year. Even if a box can be delivered for around €50, that represents a significant obstacle to mass-market adoption.

“For the vast majority — the mass market — the cost associated with data collection devices has to come down very significantly,” says Aldo Monteforte, CEO of The Floow. “One way is to use and rely on technologies that are already part of a consumer’s life: smartphones.”

While significant technical obstacles remain in using smartphones (no two devices are exactly the same, GPS tracking can vary significantly, considerable signal processing needs to be done to filter out the movement of the phone in the car from the movement of the car), nevertheless Monteforte was confident that smartphones were good enough.

“We have done extensive testing of smartphones. The data is remarkably accurate. It is in most cases almost as good as the data you would get from a box fitted to the chassis of the vehicle.”

“When I say good enough I mean we’re not going to get 100% of the movement of the vehicle, but maybe I’m going to get 70% or 80% of accurate mobility information about an individual.”

Customers Expect More Engagement

But, says Octo’s Hewett, what really attracts insurers to smartphones is the ability to change the relationship they have with drivers. “All insurance companies have negative sentiment in terms of what the customers think about them. Ignoring customers and hoping they never call you unless they want something — i.e., a claim — which is the general mentality, is, I am afraid, something that should be confined to the annals of history. Customers expect more engagement. They expect to have ongoing relationships based on trust and value exchange.”

Hewett suggested companies could offer not just feedback and potential discounts based on how you drive, but special offers at rest stops to encourage drivers to take breaks.

All of which begs the question, why has this industry not been disrupted yet? There are any number of start-ups tackling the hardware problem — building smartphone apps or OBD-devices (or combining the two) that give drivers feedback on their car and driving performance, but in Europe, outside of the UK’s particular teen market, few have managed to create an innovative insurance business that combines technology and underwriting.

Carrot Not Stick

For new, teenage, drivers in the UK, the cost of motor insurance starts at prohibitively expensive, and only gets worse. One company looking to bring down that cost is Carrot Insurance. Founded in September 2011, the company uses its own proprietary “black box,” coupled with a smartphone, to reward drivers for good driving behavior.

“Sadly everything you read about young drivers is pretty much true,” says Andrew Brown-Allan, Carrot Insurance’s Marketing Director. “Unfortunately the crashes that they have tend to be more severe and tend to have much higher fatality rates.”

Carrot’s solution is a device fitted to the car by an engineer. Feedback is provided; good behavior leads to cash rewards charged to a card. “They make the connection between driving safely, ‘my insurer gave me the money to buy this watch, cinema ticket, festival ticket’ – whatever happens to be.”

For Carrot’s drivers, the benefits are two-fold: first, by agreeing to have the device fitted, and limiting mileage, drivers can significantly lower their premiums (although Brown-Allan did say that standard actuarial underwriting factors would also affect the premium). Second, the feedback provided can help inexperienced drivers become better. In the UK, according to government figures, 50,000 drivers will crash in their first six months of driving.

“I think it’s going to happen,” says Thomas Hallauer, research director at Ptolemus. “There is a regulator issue here, not everyone can become an insurer very quickly and I suspect the authorities will have something to say about competition. But it is bound to happen.”

Monteforte is not so sure. “The insurance industry is extremely reliant on branding. Brand is important to consumers because you know that when you have a problem you want to be taken care off. That plays an important part.”

In fact it is questionable whether this will be a good market for either traditional insurance companies or challengers. First there is the overall decline in the car industry. Looking at the U.S., between 2007 to 2011 the number of cars bought by people aged 18 to 34 fell by nearly 30%, says the Automobile Association of America.

While in Europe, according to the Association of European Carmakers (AEC), new car registrations have fallen year-on-year since 2007. Figures show that fewer cars were registered in 2013 than at any point since 1996.

Driverless Cars Don’t Crash

Then there is the agreement that by 2018 all vehicles in the European Union must be fitted with eCall, a system that automatically calls the emergency services in the event of a serious accident. Since the car will already have a telematic device, manufacturers could use it to offer other services, potentially including UBI. Hallauer was not so sure.

“Becoming an insurer is not a massive step for a manufacturer, but it is still a step and it is a dangerous one,” says Hallauer. “You may have to fight against the customer who is plainly lying about the accident, a customer who’s saying they got whiplash and the manufacturer will have to say, ‘no I can see from the vehicle that the bump was less than 1G so you are lying.’

“What they might do is say you can pay less insurance if you drive less. BMW has done something with Allianz for its electric vehicles. With BMW insurance you will have a mileage discount if you drive less than X kilometers. It is very limited.”

Much more worrying, says Hallauer, is what Google is up to. “Google has filed to become an insurer in the U.S. already. They have all that it takes. It has hardware — it has its own platform, Android. Data analytics is what Google does best. And it has mapping. It is well placed to disrupt the market. Everybody is waiting for Google to move.”

And then, ultimately, comes Google’s driverless car — the ultimate disruption. If driverless cars don’t crash (or hardly) what need car insurance at all?

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