Building Insurance Business Using Data to Set Prices

TU-Automotive reported in November that General Motors is launching itself into the insurance market.

The aim is to use driving and vehicle data to set insurance prices employing its established OnStar service. This is the automaker’s connected-car service, which is installed on all GM vehicles in North America. Customers who sign up, agree to permit their driving habits to be tracked remotely. Drivers who obey speeding limits or avoid sudden stops as well as demonstrating good overall driving behavior are rewarded with cheaper insurance premiums.

UBI trends

Katie DeGraaf, head of telematics at OnStar Insurance Services explains: “Customer interest in driving and mileage-based insurance (UBI) products has accelerated owing to Covid-19 pandemic and also to general digital service sophistication,” adding that throughout the pandemic customers have increased their use of digital insurance services. However, their driving has decreased.

She therefore comments: “At the height of the pandemic, aggregate US driving was down just over 50%.  Today, we remain down close to 30% compared to prior years.  As companies shift to more remote work flexibility, we don’t know how or when driving trends will stabilize.  This change in driving, coupled with more time to assess insurance decisions, customers have adopted technology-driven insurance solutions, including usage- and mileage-based pricing.”

Another trend that she is seeing is revolves around the insurance industry’s increasing investment in the customer adoption of technology-based solutions. She finds that this isn’t without its challenges. There is an increased focus and prioritization of UBI. To drive adoption several of the largest insurance, she says, continue to run large marketing campaigns. The aim is to drive consumer awareness about this type of insurance.

“Incumbent insurers have also increased their use of driving-based factors in their ratings, including increasing surcharging and discounting,” she explains before adding: “We expect to see this trend continue.  In addition, throughout the pandemic, most insurers rapidly accelerated their maturity in digital claims handling. Taken together, this demonstrates an overall maturity in digital transformation of customer insurance services.”

Smartphone-based solutions are currently dominating the market, and they are currently being used to understand driving behavior. DeGraaf believes these solutions reduce customer friction, while cutting insurer’s operating costs in comparison to at least of the previous models that used aftermarket technology.

“In parallel to this, smartphone hardware and software companies have increased customer transparency and control in data sharing”, she explains.  The key issue though is that insurers telematics programs this has often resulted in “fewer connections and poorer quality data.”

Stream of innovations

Frederic Bruneteau, managing director, Ptolemus Consulting Group says since UBI was invented, there has been a stream of innovations. However, as indicated by DeGraaf, he concurs that the market started with “aftermarket devices such as black boxes and OBD dongles, OEMs – GM being one of the first – have been collecting data for insurance for over five years”. Mobile apps, he says, have successfully emerged within the last three to four years to collect driving data. “Most apps have been used to collect driving behavior data for Pay How You Drive (PHYD) insurance,” he explains.

He notes that the fast growth of connected cars “is facilitating the collection of mileage data by insurers, either directly from OEMs or through Vehicle Data Hubs (VDHs) such as LexisNexis or Wejo”. As for mileage-based insurance, he says it’s extremely simple to understand, less intrusive than pay how you drive (PHYD) insurance.

“For all infrequent or low mileage drivers, it is good enough. This has driven the success of a company like Metromile”, and so in his opinion there is room in the market for multiple device solutions to co-exist. Each solution has its own specific advantages and use cases.

Pandemic imbalances

This multi-solution co-existence is perhaps particularly poignant because he points out that the pandemic has created significant imbalances in policyholders’ mobility. He explains: “Some are not moving at all and are still paying the same amount. With the growth of remote working, this is only likely to continue. This situation creates the right conditions for an explosion of mileage-based insurance where everybody pays based on how much they drive.”

He also points out that it’s not new for automakers to sell insurance: “Even selling data to insurers has been around for a long time. GM has been selling mileage data for quite a while now. Many insurers have access to their data, from Progressive to State Farm.”

“Certain OEMs such as Toyota even have integrated insurance for a long time with a specific partner, Aioi Nissay Dowa. Some OEMs, such as Volkswagen, are working with an integrated partner, Allianz, with whom they have strong ties for insurance. Some other OEMs tend to shop around for the best insurance deal and change insurance partner regularly. For example, PSA would sell its insurance as PSA Insurance, but the policy would be underwritten by an external partner that would change every few years. And then there is a third model where OEMs work with multiple insurers. Tesla is another OEM looking at how it can customize insurance for the benefit of the customer.”

OEM insurance branding

So, what’s new about what GM is doing? Well, first of all it is launching OnStar under its own brand as GM OnStar. However, OnStar itself isn’t new. It’s been around for 20 years now as GM’s connected car service. Beyond UBI, it also offers automatic crash notification (ACN) and assistance. “GM can detect when you have had a crash, how severe it is, send assistance, call your vehicle, and provide you another vehicle,” he reveals.

There are also concierge services, and they are trying to differentiate by offering more intelligent insurance. The price is based on how much you drive and how safe you drive. “The safer you drive, the less you pay for your insurance, and the benefit here is as an OEM you can provide mileage-based insurance. If you drive less, you will automatically pay less,” he explains.

In March 2020 this led to several insurers in the US sending much money back to their customers. That’s because they weren’t driving so much in response to the Covid-19 pandemic. He adds that there is a prerequisite to understand the parameters. For example, it’s riskier to drive at night or during a hurricane. For those people that are subscribed to the OnStar service, they can also have crash assistance.

OEM insurance advantages

As far as OnStar is concerned, the advantages of automakers developing their own insurance businesses is significant because they know their vehicles, safety, repair and maintenance better than anyone. DeGraaf adds: “OnStar helps more than 6,000 drivers per month at the time of the unexpected.  For more than 20 years, GM and OnStar have iterated on leveraging technology, connectivity, data and customer experience to understand safety and provide proactive help to drivers.”

Bruneteau responds: “I am putting myself in the shoes of OEMs. For me, the major advantage is the fact you are creating a long-term relationship with your customer. With warranties that last up to 2-4 years, OEMs generally keep the customer relationship during that period but then lose it quickly afterwards. When they sell connected insurance, they can sell you customized insurance by knowing when you are driving, how safely you drive and how often you drive to offer better insurance pricing, which will help maintain the relationship for a long time.”

De Graaf concludes that the current underlying trends are in OnStar’s and GM’s favor because she finds that “customers expect to have personalized, digital and easy experiences that are proactive in solving their problems and keeping them safer.”

To this end she says OnStar Insurance is able to leverage technology to provide insurance that is both fair and personalized. This is aided by the fact that as an OEM, GM, can leverage its customer touchpoints throughout the vehicle’s ownership period. Through this, GM hopes its business model will be increasingly efficient, leading to a better insurance price.

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