Insurance telematics business models: Beyond the discount

Insurance telematics business models: Beyond the discount

Psst! Want a discount on your car insurance? Turns out that’s a line a growing number of drivers just cannot resist.

A generous discount through insurance telematics has been the chief selling point of Progressive’s Snapshot solution in the United States. And the situation is no different in the United Kingdom, where price is expected to remain the main differentiator for the foreseeable future.

“The essential value proposition for the next three to five years will be the discount,” says Praveen Chandrasekar, program manager for telematics and infotainment research at Frost & Sullivan.

Still, a growing number of auto insurers is starting to look beyond the simple discount in anticipation of its role diminishing as insurance telematics, or usage-based insurance (UBI), becomes mainstream.

It’s what’s already happening in Italy, a country with the highest insurance telematics penetration rates in the world. But even in the United States, companies like State Farm are starting to look at ways of bundling straightforward driver tracking with other value-added services to differentiate themselves from competition.

Beyond the discount

This typically means moving from the pay-as-you-drive (PAYD) business model, which calculates premiums according to the number of miles driven, to pay-how-you-drive (PHYD), which factors in driving style, and manage-how-you-drive (MHYD), which also incorporates driver feedback.

“In five or ten years, all insurers will have dynamic driving data, so all will be able to offer discounts,” says George Ayres, vice president of global sales for Verizon Telematics. “There will be no more asymmetry in terms of what they know about customers, so price alone won’t be as effective [for acquiring and retaining customers]. …The insurers who are out front on this idea are realizing [that soon] all will [have to] start to provide much wider breadth of services to keep those captured through price.”

(More than 50% of leading insurers in the United States and the United Kingdom already offer insurance telematics of some kind, according to Celent, the financial services consultancy.)

(For more on UBI business models, see Telematics and business case for UBI and Telematics and customized UBI business models.)

Adding value through services

These services can be as simple as sending additional driving data to the driver’s smartphone, or as complex as auto insurance bundled with a customer relationship solution that sends alerts for scheduled maintenance.

Britain’s Autocar recently made headlines when it launched Autocar Start, an innovative motoring package that bundles a new car with insurance telematics and professional instruction.

According to Autocar’s Jim Holder, Autocar Start specifically targets young drivers with a provisional license, offering them a new smart fortwo coupé pulse, 40 hours of professional instruction from the Mercedes-Benz Driving Academy and a usage-based insurance package from Carrotall for $450/ month over three years.

What is at heart of these solutions is giving the insurance company a “more critical function” in the driver’s life, Ayers says.

The Italian way

Italy’s Generali Group is one example of how this can be done. It launched its first telematics-based auto insurance program in 2006 and today has several hundred thousand UBI drivers in Italy alone.

Last year, Italy, became the first (and so far the only) country in the world with a law that requires insurers to offer lower rates to drivers who opt for a telematics tracking device — how much they drive and how well they do it is a whole other matter.

But Andrea Jurkic, head of marketing strategy, insurance development, Generali Group, says this hasn’t been a problem. Rather than attracting customers who want the mandated discount, Generali is interested in customers who “don’t need the discount,” he says.

According to Jurkic, Generali aims to have customers stay because of the long-term information they get about how they drive and the opportunity to improve their habits. This kind of customer “wants to create a link between him and the insurance company based on trust and transparency of information,” Jurkic says.

It turns out Generali’s UBI customers also want to be educated. According to Jurkic, they want to know, not just about their tendencies behind the wheel, but about the safety of the roads they’re driving and suggestions for the “correct way of driving on a particular road.” Generali offers this information via the web and smartphone apps.

The State Farm approach

In the United States, State Farm’s “Drive Safe & Save” program is at the forefront of this move beyond the discount. It uses an “In-Drive” device that remains plugged in to the vehicle’s OBD2 port as long as the policy is in force and collects data for a broader range of applications.

Services are free for the first year, and State Farm offers drivers a policy discount of up to 50%, evaluated every six months, based on driving habits, mileage and other factors, such as age, occupation and place of residence.

In addition to monitoring mileage and driver behavior, the solution can also offer, for a small monthly fee, coaching to improve driving habits, as well as to provide information about the need for vehicle maintenance, keep track of teens behind the wheel and help locate the vehicle if it gets stolen.

Customers’ willingness to pay

Chandrasekar is skeptical that many drivers in the United States are actively looking at the driving data information their insurers can provide. But Ayres points to the growing aftermarket telematics industry as evidence that customers are interested in, and willing to pay for, value-added services.

Already, companies are selling aftermarket devices to manage teen driving and vehicle health, as well as emergency assistance. “Those don’t have anything to do with automotive insurance, but they’re capturing and using the same data, and some people are buying those,” Ayres says.

If people are paying for the very value-added services that insurance telematics programs can include, how much more interested would they be if they could get those benefits along with a discount on their insurance, the logic goes.

Value-added services provided via an insurer’s telematics device can be deployed on vehicles with an OBD2 port regardless of brand, so a family could actually operate the same system on all their cars and be eligible for a discount on their insurance premium, Ayres explains. Ayres also notes that more and more car OEMs are advertising their telematics systems, which further raises awareness about the benefits of a connected vehicle.

Although Dave Pratt, general manager of UBI at Progressive, reports that his company is sticking with the discount-only business model for now, he says his company is considering a broader range of services in the future. However, rather than using a dedicated telematics device, which is expensive, it is looking to leverage OEM-embedded telematics systems. “If we could partner with OEMs and get data from built-in devices, that would potentially bring costs down,” he says.

(Frost & Sullivan’s Chandrasekar believes Progressive has the most customers in the United States because they’ve kept their Snapshot program simple and flexible. There’s no cost to potential customers to have the device in their cars for the monitoring period, and drivers get concrete feedback on their habits, along with the potential to shave 30% or more off their premiums. They can also opt out of the program after a one-month trial, or whenever their six-month policy term is up.)

OEMs and insurance telematics

Further down the line, Chandrasekar envisions a world where drivers pick a UBI insurance provider at the time of vehicle purchase. Ford has already partnered with State Farm to enable UBI via SYNC, and GM’s OnStar can connect vehicles to UBI from GMAC. “If automakers get into the chain, they can monetize data by selling it to insurance companies,” he says.

And more than just UBI policies, this sort of data and connection could keep vehicle owners coming to the dealership for hassle-free maintenance. “UBI is going to become a part of the bigger circle,” Chandrasekar says. “Instead of going to State Farm or Progressive, if you already have OnStar or [Hyundai’s] Blue Link, why not make use of a single box for a multitude of services, one of which is UBI.”

Once OEMs and insurers are sharing data, the business model options explode. By examining a customer’s driving history, habits and cars owned previously, an insurer or OEM could suggest a vehicle he might like or that might be a good match for his driving habits.

The insurer might even offer an in-car coach (through the telematics device) to help him change lanes more effectively if his record shows this to be a problem area. And if he agrees to use it, his insurance premium will further decrease. “This is big data,” Chandrasekar says. “Everyone can use the data by feeding it back to the customer and back into product development.”

So, as the UBI market grows more competitive and discounts become the norm, auto insurers across the United States and beyond may begin to think like Italians.

“A black box can create a relationship with the customer in a different way,” Jurkic says. “[The customer] feels good that he’s buying something more than a [liability coverage] product. He’s buying a relationship, a way to communicate with the insurance company.”

Jessica Royer Ocken is a regular contributor to TU.

For all the latest telematics trends, check out Insurance Telematics USA 2013 on Sept. 4-5 in Chicago, Telematics Brazil & LATAM 2013 on Sept. 11-12 in Sao Paulo, Brazil, Telematics Japan/China 2013 on Oct. 8-10 in Tokyo, Telematics Munich 2013 on Nov. 11-12 in Munich, Germany, Telematics for Fleet Management USA 2013 on Nov. 20-21 in Atlanta, Georgia, and Content and Apps for Automotive USA 2013 on Dec. 11-12 in San Francisco.

For exclusive telematics business analysis and insight, check out TU’s reports: Telematics Connectivity Strategies Report 2013The Automotive HMI Report 2013Insurance Telematics Report 2013 and Fleet & Asset Management Report 2012.

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