GEICO had the right idea about following Progressive—and the majority of top auto insurers—into the world of telematics, but the benefits of the technology go well beyond matching rate and risk when quoting new business, researchers say.

In fact, insurers that have used telematics monitoring for limited periods to price new auto insurance business in the past are now offering continuous monitoring to give drivers ongoing control over premiums.

“Why would an insurer want to reduce rates for an in-force book of business?” asks William Wilt, president of Assured Research, in a report he co-authored last month with Ryan McMahon, vice president of Insurance and Government Affairs for telematics provider Cambridge Mobile Telematics.

The short answer is that reduced claims and claims adjustment expenses can more than make up for premium credits, according to the report, which references a number of supporting profitability studies by university researchers and insurance analysts.

Insurers moving beyond 90-day or other short-term monitoring periods to continually engage with insureds can raise awareness of risky driving habits and incentivize policyholders to change them with further discounts or through gamification strategies, the two authors said in the report, titled “Telematics Will Make the World’s Roads and Drivers Safer (And Insurers More Profitable).”

University Research

• “Buying Data from Consumers: The Impact of Monitoring Programs in U.S. Auto Insurance” by Yizhou Jin of UC Berkley and Shoshana Vasserman of Stanford, is the December 2019 study mentioned in the accompanying article, finding that safer drivers opt in to telematics-based auto insurance programs and that those drivers become safer when monitored. The researchers examined data from an unnamed U.S. insurer during a five-month monitoring window starting at the time customers received an upfront discount and plug-in device to accumulate 100-150 days of monitored activity with real-time feedback.

• “Sensor Data, Privacy, and Behavioral Tracking: Does Usage-Based Auto Insurance Benefit Drivers?” by Miremad Soleymanian and Charles Weinberg of the University of British Columbia and Ting Zhu of Purdue University, based on similar data, found that UBI customers decrease their daily average hard-brake frequency by an average of 21 percent after six months.

• “Does Immediate Feedback Make You Try Less Hard? A Study of Automotive Telematics” by Vivek Choudhary of INSEAD, Masha Shunko of the University of Washington and Serguei Netessine of The Wharton School, found, in contrast to other studies, that driving scores worsened on a subsequent trip for Singapore drivers who reviewed feedback after each monitored driving trip.

In fact, a 2019 university study cited in the report reveals that the act of monitoring in and of itself promotes safer driving, even without incentives. That study found that drivers who opt into telematics-based auto insurance programs become 30 percent safer when monitored.

“I think that’s the biggest opportunity that exists in the market,” McMahon told Carrier Management, referring to the shift from telematics short-term pricing programs to the use of telematics for continuous interaction with policyholders. Importantly, continuous engagement also allows for insurer cost savings and improved accuracy during the claims adjustment process, he said.

“If insurers want to maintain their margins while premiums are going down [from telematics-based discounts], they need to use the telematics to be smarter in the way claims are adjusted,” Wilt agreed.

Profits Better for Telematics Programs

In their report, Wilt and McMahon review the history of telematics from the plug-in dongles of the past to the smartphone-app and smartphone-plus-windshield tag programs of today, describing pay-how-you-drive programs that monitor speeding, braking, cornering and distracted driving, as well as pay-per-mile programs that measure distance traveled. Telematics is the overarching technology behind these usage-based insurance programs, McMahon said, noting that the terms UBI and telematics are sometimes used interchangeably.

There’s also nuance in the UBI programs themselves, he said, estimating that there are somewhere between five and nine different ways in which insurers market the offerings, with some intertwining pay-per-mile and pay-how-you-drive components.

The Assured Research-CMT report cites various other studies indicating that telematics programs are anywhere from 10-25 percent more profitable than non-telematics programs. Earlier this year, Berkshire Hathaway Vice Chair Ajit Jain did a head-to-head profit comparison between Berkshire’s GEICO auto insurance unit and Progressive, noting that GEICO had fallen short on both growth and margins because it had “clearly missed the bus, and was late in terms of appreciating the value of telematics”—specifically, the value of matching rate to risk.

Progressive first introduced its pay-as-you-drive Snapshot program in 2008, and insurance analysts like Credit Suisse’s Michael Zaremski have estimated that Progressive’s telematics-based auto insurance policies are 15-25 percent more profitable than its non-telematics policies. (“PGR: Oh, Snapshot—Telematics More Profitable Than We Estimated,” Credit Suisse research, July 22, 2019)

But while early-movers on telematics saw a roughly 10 percentage point improvement in their loss ratio simply as a result of a “self-selection bias”—the fact that good drivers willingly submit to monitoring—insurers can now expand the profit advantage with telematics-based claims initiatives.

During a first-quarter investor event, an analyst asked Progressive’s CEO Tricia Griffith, a former claims executive, about the value Progressive might also be getting from Snapshot on the claims side. “We’ve been testing and looking into claims and Snapshot, understanding the facts of loss, fraud and other things for quite some time. I think we’ve had 150,000 customers [for whom we] currently have access to claims information should they have a loss. And we’ll have more to come on that…We think it is an important next step for the use of telematics,” she said. (Editor’s Note: Progressive’s financial statements indicate that total personal auto policies in-force number more than 17 million.)

Fast Fact: According to Cambridge Mobile Telematics, 23 out of the top 25 auto insurers use telematics in their business models in some way.

The Assured Research-CMT report notes that when carriers move toward continuous engagement with customers, instead of limited monitoring, they are able to gather data within minutes of a collision and that the quality of data provided by telematics devices exceeds that of information an insurer would receive from a police report. An infographic included in the report titled “Crash Storyline” provides an example, giving the description of a hypothetical event complete with details about speed before and after impact, the duration of the crash, and reactions of the car and driver (indicating evasive maneuvers, yawing during crash, airbag deployment and drivability post-crash, among other items).

Sign Me Up: Drivers and Auto Insurers Saying Yes to Telematics

While continuous monitoring is on Progressive’s radar long term, Griffith noted that the carrier’s biggest effort around telematics in recent months has actually focused on shortening the signup monitoring period down from six months to 30 days. The effort was aimed at helping people who drove less during COVID lockdowns find some premium savings.

She also reported that Progressive’s effort wasn’t highly successful in terms of getting customers to adopt Snapshot telematics-based insurance. According to Griffith, as of the date of the conference call in early May, only 40,000 of 14 million customers who received communications about the change took advantage of it, 9,400 reached the 30-day point, and only 4 percent opted to join the program.

Without any specific knowledge of Progressive’s marketing campaign to invite drivers to try the shorter monitoring time frame, McMahon noted that Progressive’s Snapshot program includes both discounts for good driving and surcharges. More typically, as McMahon and Wilt describe in their report, after providing an upfront discount for agreeing to 60-90 days of monitoring, insurers offer only savings of up to 30 percent for drivers opting to accept telematics-based policies.

Those disappointing numbers don’t line up with more intuitive results from joint surveys conducted by Cambridge Mobile Telematics and J.D. Power. CMT and J.D. Power found soaring levels of consumer interest in both pay-as-you-drive and pay-per-mile programs—with an increase of 250 percent reported over the course of seven surveys conducted during the weeks following the onset of the pandemic.

A graphic in the report compiled by Wilt and McMahon illustrates the climb, showing that in April last year, roughly 40 percent of respondents said that COVID made them more willing to consider usage-based insurance compared to just 14 percent a month earlier.

A separate CMT survey taken just before the onset of COVID found that roughly 9 percent of drivers were interested in pay-by-mile solutions. A year later, responding to the same question, the number of drivers interested in pay-by-mile insurance tripled to just under 30 percent.

With demand picking up, on the supply side of the equation, McMahon and Wilt report that 23 out of the top 25 auto insurers use telematics in their business models in some way, with the telematics books of captive agency and direct writers leading the pack. “The group that has been left behind to date has largely been independent agent-based companies…What is interesting is that over the past 18 months in the U.S. this gap is starting to narrow (slightly) as more insurers introduce products tailored specifically for the independent agent consumers and drive more activity within the channel,” the report says.

Discovering Games and Rewards

Focusing in on the opportunity to change behaviors, the report notes that some insurers have begun to offer programs that give drivers incentive to drive less—lowering carbon emission and insurer risk in the process. The report also describes a creative approach to lowering risk: gamification, which is the application of game-like elements to non-game products or services to encourage engagement.

“Extrinsic features like point scoring, badges and rewards attract people to the product, while intrinsic features like contests, social sharing and feedback encourage continuous interaction,” the report says.

CMT teamed up with five cities over the past five years to experiment with safe-driving contests. “There are three behaviors that are fairly well learned. The easiest to change are speeding and smartphone distraction, and then hard braking is behind that,” McMahon said. In fact, the report shows that the city of Boston was able to reduce distracted driving by almost 50 percent in two separate contests in 2016 and 2019, and hard braking by 57 percent during the latest contest.

Last year, Uber and Progressive sponsored a three-month Safest Driver contest for Uber drivers in Austin, Charlotte and Raleigh-Durham, offering weekly prizes of $500 and grand prizes totaling $10,000 for first, second and third place drivers while reducing risky driving behaviors by 57 percent.

“The smartest company on the planet that’s doing this is Discovery,” McMahon told Carrier Management, referring to the South African insurance company’s success in incentivizing policyholders to become better drivers with rewards ranging from coffees, smoothies and shopping vouchers to 50 percent cash back on their fuel bills each month. According to a white paper published by Discovery this week titled “The journey of creating a nation of great drivers,” during the first six years of its telematics-based reward program, the insurer saw a 32 percent increase in good drivers on its book.

“If all South Africans were on Gold or Diamond Vitality Drive status, we could achieve an up to 90 percent reduction in the number and cost of road accidents,” the white paper asserts, referring to the best two tiers of drivers in the Discovery’s program. (Editor’s Note: Discovery Insure invested in CMT in 2013 and first partnered with CMT to launch a smartphone-enable telematics device in 2014, according to the white paper.)

Discovery’s Vitality Drive telematics-based program is also highlighted in a report from The Geneva Association published last week titled “From Risk Transfer to Risk Prevention-Hot the Internet of Things is reshaping business models in insurance.” The Geneva Association report notes that Discovery’s auto telematics portfolio now has 270,000 customers and that customers pay fees to enroll rather than being offered an upfront discounts.

The Geneva Association report, which provides multiple case studies about the use of other IoT technologies beyond auto telematics in insurance, notes that Discovery’s journey actually began on the life-health side of the business, with rewards for healthy life style changes.

While other global life-health insurers have mimicked the approach, in the U.S. property/casualty insurance market there has been one big obstacle to rewards-based programs that incentivize risk reduction: anti-rebating laws set forth in each state. But things may be changing, Wilt and McMahon said, noting that the National Association of Insurance Commissioners has been active creating model laws that enable the use of tools like telematics-based risk reduction products. “It is worth looking at the statutes in more detail to understand how each state varies in their approach,” they wrote in their report.

Separately last week, the Consumer Federation of America published a report, “Watch Where You’re Going: What’s Needed to Make Auto Insurance Telematics Work for Consumers,” advocating that regulators adopt strong data protection standards and guard against unintended biases (for example, penalizing night-shift workers with programs that record driving time of day), among other things. Still, the CFA report, which provides a history of telematics in insurance and specific details of some insurers’ programs along with those concerns, stresses the potential benefits as well. “In theory, telematics could end the use of…non-driving factors that disproportionately harm lower-income consumers and commonly have disparate impacts on people of color” when determining premiums,” CFA said.