Canadian Carriers and UBI Device Choices

As usage-based insurance (UBI) begins to gather steam and enter the mainstream market in Europe and the United States, the product is still very much in its infancy in Canada. One reason for this time lag, says Dan Maddison, director of market research and development at the Co-operators, is that auto insurance is highly regulated in Canada and provincial regulators must approve UBI products.

“It took time for them to determine what kind of telematics programs would best address data privacy and fairness to consumers,” he explains. “It took a while to get the programs approved.”

Currently, Maddison says, “a minority” of carriers have UBI products, “but most of them are thinking about it and it is now perceived as a competitive disadvantage not to have it.”

There is also a competitive disadvantage in provinces such as British Columbia and Manitoba where insurance is written by the provincial government, according to Colin Wright, principal at Corner Two Consulting, which focuses on UBI and digital service delivery for the insurance industry in those two provinces and others. Wright says simply, “It’s not a competitive environment.”

The Corner Two Consulting executive adds that in Quebec the regulators are “a lot more laissez-faire and you are allowed to discount and surcharge. However, as rates are already low, you have less premium room to play with.”

This leaves the provinces of Ontario and Alberta as the most attractive large markets for insurance telematics solutions. “Ontario has the highest premiums in the world, I think,” Wright says, only half-joking. “And this is basically because of accident benefits. Here you have consumers looking for rate relief.”

He explains that the elevated rate of fraudulent claims is one reason the premiums are so high, but it is also the biggest province with the most drivers, “so this is where you want to see some action in UBI.” But the conservatism of the regulators has limited the solution’s expansion. “The regulators want to be assured that data is carefully collected, accurate and accurately predictive,” Wright says.

But he suggests that the currently small Canadian UBI market is impairing the predictive quality of the data. “Today, the definition of a good driver is very limited,” he explains.

“For example, discounts are only given if you drive less than 15,000 kilometers a year and there are no benefits to someone who drives at night and is often in stop-and-go traffic.

But in the Greater Toronto Area, you have people who drive 100 kilometers to work and back every day. These people are automatically not eligible. Are they bad drivers? Not necessarily.”

These regulations limit the ability of carriers to accurately price their premiums. “The more people you have in the program, the more you can identify different driver types, recognize the good drivers and re-price the market,” Wright explains.

A number of Canadian insurance companies are now putting a UBI program in place or considering it and are therefore faced with the crucial question of what device to use to gather and transmit driver behavior data: OBDII, a smartphone or a combination of the two.

The key factors they must weigh in coming to a decision are cost, data quality and ease of use for the customer. Each of these solutions has advantages and drawbacks, and whatever the decision, there will be a trade-off. That wasn’t the case two years ago, when the Co-operators was investigating options.

“We were one of the first [Canadian insurance companies] to offer UBI,” says Maddison, the Co-operators exec. “When we started, there weren’t many options besides the dongle. That was the predominant option at that time. A new company coming in today will have more options.”

An issue with an OBD2, he explains, is the cost of the device, which is borne by the carrier. However, “the data collected is better and more consistent than the smartphone and it is plugged in all the time. It stays with the vehicle.” With the smartphone, on the other hand, “you could be traveling in another vehicle, or even a taxi, or walking,” he says.

In addition, Maddison continues, the OBD2 dongle offers a convenience to customers in that they “put it in the car and forget about it. With the smartphone, you always have to make sure it’s charged. And you can’t forget it at home.”

On the other hand, the smartphone offers significant cost benefits, he says, because the carrier is not paying for it “and you can piggyback on the customer’s existing data plan.”

However, Maddison cites another variable that is now being considered, and that is how much driver monitoring is actually necessary. “Is it cost-effective to maintain continuous monitoring?” he says.

That is one of the questions he and his company will be considering with a view to expanding its UBI product. “We’re looking at all the options,” Maddison says. “We’ll ramp up; the question is how fast the ramp-up will be. We’re going to look at the data and customer input before we decide.”

Other Canadian insurers looked at the impressive record of the American carrier Progressive’s UBI product and are spending large amounts of money on advertising on TV, as Progressive did.

“The perception is that the safest drivers will put their hands up first, and they want to grab them before the competition does,” Maddison explains, adding: “That’s not our strategy.”

Wright suggests that possibly as a consequence of the regulators’ prudence on data, the half-dozen or so carriers who now offer UBI use the OBDII device exclusively. While this solution pleases the regulators, because of the quality of data it gathers, it is not quite foolproof. “OBDII doesn’t tell you who’s driving the car,” he notes.

He sees another value for the insurer in the smartphone besides cost savings: its use as a marketing tool. As an example, Wright cites the recently launched Test Drivewise app from Allstate Canada, which allows consumers to record their driving and have their driving behavior rated on the basis of such data as speed, braking, and the time of day that they drive before they decide whether or not to purchase a policy.

Christopher Dell, senior director, Product Management & Development, at Intelligent Mechatronic Systems (IMS), the TSP that provided the UBI solution for the Co-operators, agrees, saying that “the smartphone’s data collection capability is a cost-effective presentation unit.”

He says his company offers a UBI discount app with its DriveSync connected car platform that allows insurers to collect driver behavior data and show the driver his rating before he signs with the carrier.

This has another benefit, for both carrier and consumer, in that “it is a great mechanism for the consumer to experience [data gathering] and, if comfortable with it, to proceed,” making it an easier sell.

Carriers can also use the smartphone as a market research tool, Dell says, by running pilots in regions or provinces, thereby collecting information on interest in a UBI product there. “And when they find sufficient interest, they can then fast-track their entry into that market,” he explains.

The smartphone-based UBI product can also offer a more effective CRM solution for the carrier than a port-mounted device, he says. “People are used to their cells and they can use it to interact on social media,” Wright says.

As part of its solution, IMS also offers gamification services in its app, allowing potential customers to compare their driving ability with a cohort and earn “badges” by, among other things, displaying safe driving skills. The drivers can then share their app experiences and achievements via social media. This offers a double benefit by functioning as free publicity for the carrier and turning the UBI solution into part of the driver’s daily lifestyle.

“Mobile may be a more effective way to reach a certain market segment,” Dell says. “It is a stickier solution.”

He also rejects the notion that it is easier to cheat with a smartphone than the dongle. “You can always pull the [OBDII] device out of the car,” Dell says. And his company offers analytics around the mobile phone for suspect behavior.

“Our DriveSync platform has an administrative portal that looks for behavior that an insurance company may want to follow up on,” he explains. “We don’t want to provide technology without the tools to manage it.”

But this does not resolve the issue of the quality, consistency and reliability of the data gathered by the smartphone, an important issue for Canadian regulators. A hybrid solution—which uses an OBDII device to gather data, transmit it to the customer’s smartphone, which then sends it to the back end— offers the best of both devices, data quality, cost-effectiveness and stickiness.

As the Co-operators’ Maddison puts it, “This ensures the quality and consistency of the data while offering cost savings from data transmission.”

Corner Two’s Wright calls the hybrid an “excellent solution, because it drives costs out of the model and shifts the costs to smartphone customers.” He adds that Canadian insurers just coming to the UBI market “have got to squeeze it at both ends: drive costs out and find other sources of revenue,” such as value-added services.

However, he says value-added services are a “difficult sell” in Canada because consumers just coming to the solution because of the premium relief it offers may not be eager to spend more money.

But Dell argues that the hybrid solution is not the Holy Grail everyone believes it to be, because it is not trouble-free.

“The OBDII is cheaper because you don’t have a cellular chipset and you are not paying for the data transmission, but the Bluetooth dongle and smartphone connection is a potential friction point. It may create gaps in data transmission if the Bluetooth dongle and smartphone ‘unpair’.”

In addition, if the Bluetooth dongle needs a software update, it may require that it is first downloaded to the phone. “It adds a lot of complexity to the solution,” he says.

Dell sees the Canadian UBI market at an important turning point. “The OBDII is now viewed as the gold standard, but there is a lot of mobile coming up. There’s a lot of interest,” he says.

The Co-operators’ Maddison is very optimistic about the future of UBI in Canada. “Consumers see it as a much more fair option and they are getting more comfortable with sharing personal information, while on the insurance side cost-effectiveness is going to be a big factor that everyone will look at closely. If the cost is in a good zone and consumers feel comfortable with it, it will take off.”

Insurance Telematics Canada 2015 will unite the emerging technical players of the UBI space with Canada’s biggest insurance carriers and brokers. Check it out here.

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