Q&A: Insurance telematics and intellectual property

Dave Pratt, general manager for usage-based insurance at Progressive, has one of the hottest seats in the UBI industry today. Since 1998, Progressive has secured six patents related to UBI, and it is currently in the midst of multiple lawsuits to defend them.

The patents cover everything from the way auto insurance pricing is determined to related technologies, databases and Internet functionality. And they effectively prevent competitors from offering UBI solutions in the United States without a license from Progressive.

Progressive currently leads the UBI market in the United States with more than 1.2 million telematics insurance policies, which account for over $1 billion in premiums.

Pratt is a 22-year veteran at the company, with prior leadership roles in marketing, product management and product development. He spoke with TU’s Jessica Royer Ocken about protecting Progressive’s intellectual property, staying one step ahead of the regulators and the future of UBI.

Can you explain a bit about what the license will provide? What will companies that receive the license need to do to prepare for its activation in 2015?

With the license, all a company gets is protection from being in violation of our patents. They don’t get any of our technology or scores. In today’s world, if you’re pursuing UBI in the United States, we think that violates our patents. We’re in the process of litigating with three companies [State Farm, Liberty Mutual, and The Hartford] over this issue now. But if you participate in our license program, you can use our intellectual property without violating our patents.

As for April 2015, that’s the first time a company can use the information they gather for the pricing of insurance products. But they can start to do the work right away preparing for that. They could find a supplier for the devices. They could have devices in their drivers’ cars to collect data.

What they can’t do is actually apply a price difference based on that data until April 2015. If you think of that, it takes some time to get the machine up and running anyway, and that’s less than two years from now.

We made another [recent] announcement that’s worth noting. The supplier for our devices is Xirgo, and they’re making their devices available to companies who participate in our licensing program. It’s a big deal because we’ve gone through a lot with them—several makes and models—to make sure the device works.

This plan you’ve outlined makes sense for a company starting a new UBI program, but what about companies that have UBI policies now?

We have had conversations with those companies, but I can’t really talk about details.

What was Progressive’s thinking behind patenting UBI?

It’s like any inventor seeking a patent. We spent millions of dollars and quite a bit of time developing this, taking it from an idea to an invention that actually works. So we wanted a patent to get the market value from our invention.

It’s a pretty big deal for insurance. The data we get from UBI is our best predictor of losses. It’s a better predictor than driving record, age, marital status, credit score or any of the other things companies are now using.

So would you say Progressive invented UBI? Can you explain?

Yes, we are the inventors of UBI. Our evidence would be that we filed a patent, and the U.S. patent office examined it and said yes, you are the inventors. As part of the litigation [to protect our intellectual property], we went through a reexamination of one patent, and it was upheld last year. We don’t just claim to be the inventors of UBI, we are.

And what prompted Progressive, holder of six patents, to decide to license your intellectual property?

Insurance is a regulated business. As UBI grows and becomes bigger, a more mainstream part of the market, we would expect that regulators would encourage us to allow competitors access to our rating approach. Rather than sit and wait for that demand to come, we wanted to get ahead of that and offer a licensing program to anticipate the demand expected from regulators.

Do you believe some litigation may still be required to settle issues related to your patented IP?

We have three lawsuits still ongoing. I can’t talk about the specifics of those pieces. But we haven’t settled yet.

Do you foresee a need to extend your patent claims to Europe as well?

No, we don’t have patents that cover most European countries. Our patent portfolio is in the United States.

Does this licensing also signal a shift in your business model? A concession to those who might believe Progressive’s patents are holding the UBI industry back?

No, our hope is that we will continue to enhance our product and stay the leader in this space. We are offering these licenses, but my job is to keep Progressive the leader in this space even after we sell licenses.

(For more on UBI business models, see Insurance telematics business models: Beyond the discount.)

Can you talk a bit about Snapshot, which uses a temporary telematics device to track drivers for a brief period of time, rather than a permanent device for constant tracking? What are the benefits of this method? How can you ensure it’s an accurate picture of the driver’s habits? Are there any drawbacks to this approach?

Drivers keep the device for six months—their first policy term with us. It’s benefits vs. costs, a way to balance the desire for measuring enough driving behavior to get an accurate picture, but also balance expense. That’s where the name comes from. It’s a snapshot.

[In terms of accuracy,] people who get discounts based on that, when we look at their future policy terms, they continue to be better-than-average drivers.

As far as drawbacks, the [tracking] device we have gives audio feedback. If you have a hard brake, it gives a three-beep sound. Customers can turn it off if they don’t like it, but we have evidence that this does help people be better drivers.

I would love to leave it plugged in longer to continue providing this feedback, but we ask customers to send the device back to keep costs as low as possible.

People have to realize insurance is a low-margin business. Profit goals are a 4% underwriting profit.

We think this is a favorable tradeoff. People send back the device, and we can reuse it. There’s no cost to customers to have the device for those six months, and the device averages four or five years in service. Some customers take better care of it than others, but each [device] definitely goes to multiple drivers.

What does the future hold in terms of business models for UBI as this market matures?

I think we’ll see companies competing with value-added services that come with UBI. We’re investigating ideas there ourselves, but we have nothing far enough along to be able to announce it.

And I also think as [insurance companies] have more and more data, they’ll be able to make their pricing algorithms more sophisticated, so that will evolve as well. Progressive has seven billion miles of driving data now. You can find patterns in that data that we couldn’t find when we were starting.

So Progressive plans to keep your discount-only model for now.

Yes. It’s the discount-only model for now.

Any thoughts on incorporating a more permanent telematics device in the future?

We’re considering it. I think it’s more likely that we’ll be able to use new technologies that will be cheaper and will allow us to measure longer. If we could partner with OEMs and get data from built-in devices, that would potentially bring costs down. We’re also investigating mobile devices. If we could get data from a customer’s phone and not have to send devices out to plug into the car, that could change the model as well.

Jessica Royer Ocken is a regular contributor to TU.

For our coverage of Insurance Telematics Europe 2013, see Insurance Telematics Europe: Day One, Video: Holistic approach to insurance telematics, Video: Insurance telematics and the young U.K. driver, Video: Insurance telematics and real-time driver feedback, Video: The tipping point for insurance telematics in Europe, Video: Getting insurance telematics right, Video: Learning to walk before running with insurance telematics, Video: Insurance telematics and the smartphone and Video: Insurance telematics and the customer-centric approach.

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 2013, The Automotive HMI Report 2013, Insurance Telematics Report 2013 and Fleet & Asset Management Report 2012.