The Internet of Things and the End of the Auto Insurance Industry as You Know It
When Tesla and others come out with broad production of driverless cars, the question of who’s going to insure them is not reassuring to the insurance companies. Nor are a host of other threats from new technology. Insurance firms are already getting bombarded with digital disruption from two different directions: the Internet of Things and Big Data.
With $600B at stake in the global auto insurance business, the industry is going to be upended. When billions of Things (connected sensors) can communicate what they measure with other Things in the cloud in a constant barrage of both structured and unstructured data, the results will get funneled down into customized consumer choices that do one big thing auto insurers don’t typically do today: save you money!
At first blush, it would appear that insurers with their historical access to data and the creation of actuarial algorithms would be natural to adapt to IoT. However, insurers have just been behind. Their interaction with their customers is so infrequent that they have to wait for second-order data — e.g., reported auto accidents or speeding tickets processed through the DMV, to have any visibility into client behavior and risk.
“Inertia is not loyalty. With the amount of money we each spend on insurance, it’s almost unfathomable to imagine how owning our own data is going to change the shopping equation.” — Marty Ellingsworth, insurance expert.
An insurance company spends the most money on one category: paying for claims (65% of every premium dollar). If they’re lucky, when they subtract agent commissions, underwriting expenses, advertising, and all overhead, they are left with a 5–10% profit.
The grand strategy of insurance companies will be transformed by IoT and Big Data. Direct measurement of driving behavior, which can transform the way insurers make underwriting and pricing decisions, enables more rapid response after accidents and provides forensic data for claims investigation.
IoT offers the opportunity for growth and yet also a threat to existence. The impact of this change is intuitive on its face but difficult to fathom in its fullest, most radical potential.
There are four ostensible ways to help lower your auto premium. 1) Don’t be a teenage boy — they pay through the nose because of their statistical probability of having an accident. 2) Have five years of no accidents or tickets so you are classified as a “safe driver” 3) Have a good credit score (yes, believe it or not, it matters) and 4) Get a telematics tracking device linked back to your insurer installed in your car and show that you are a safe driver, especially if you’re a teen willing to drive safely.
Telematics, which is the use of wireless devices to transmit data in real-time back to an organization has been tried in the auto insurance industry for some time and is the front edge of IoT. It’s used in the context of automobiles, whereby installed or after-factory boxes collect and transmit data on vehicle use, maintenance requirements, or automotive servicing.
Usage-based insurance (UBI) is a very big incentive to adopt some aspect of telematics. Insurers already use mileage as a pricing variable, but they just haven’t had a reliable way to collect actual mileage. They typically offer lower pricing for lower mileage, with 12k miles being one common threshold. The threat that any financial player armed with the technology to qualify a driver as safe has scared the insurance industry. New tech entrants like Metromile can measure a driver’s actual mileage and provide insurance based on a per-thousand mileage scale. However, safe driving habits have an even bigger role in driving UBI, or “pay as you drive” as it’s often called in Europe.
How can telematics lower your insurance premiums?
John Sundean, an insurance industry expert and former Accenture Partner says “early insurance telematics adopters have found that, in addition to total miles driven, frequent harsh braking is a powerful predictor of accidents. If an insurer can measure that then they have a keen idea of whether you’re a safe driver or not. Harsh braking is followed closely by rapid acceleration, aggressive cornering, and late-night driving. Telematics can measure all those factors.”
In Italy, installed telematics devices have been around for over a decade as a premier option because of the high rate of auto theft and fraud. Tracking the stolen car is one key benefit of lowering an already high premium. Insurers in the UK have always had high rates for teen drivers and have offered a lowered premium for those drivers willing to have the black boxes (about the size of a cellphone) installed in their cars. In return for a telematics record that shows safe driving, these drivers can have their rates lowered from the $3K+ normal rate for teenage boys.
Progressive Insurance has recognized the threat of IoT and the importance of telematics for over a decade and has been on the front end of the U.S. effort. After all, Progressive now bills over $2B in telematics premium in a U.S. industry that only has a 2 percent penetration. Progressive has collected over 10 billion miles of driving data with Snapshot, its Pay As You Drive program, since introducing its first wireless device in January 2008. Progressive leads the usage-based insurance (UBI) industry with two million vehicles that have participated in the program.
The company has recently entered into a partnership with GM’s OnStar that will allow owners of all 2016 GM models, most 2015 models, and some 2013 and 2014 models to have their driving ability rated and get a Progressive UBI policy.
“OnStar will introduce a safe driving assessment service for its customers,” says David Pratt, Progressive’s UBI general manager. “After three months, they will send the drivers an email telling them how they did and what they can do to improve. And they will send a suggestion on the insurance option.”
Progressive is betting that drivers who see how well they stack up to others will want to turn that into saving money with it. “One advantage for the customer is that he or she never has to install a device,” Pratt says. This is not only a benefit for the customer but for the product as well. “Any technology that makes it easier for customers to participate will help UBI become mainstream,” he says.
Verizon Telematics is working with a number of insurers to track both individuals’ cars and corporate fleets. As insurance companies move into “telematics” in homes and on individuals, expect to see more partnerships being forged. State Farm and ADT, the home security company, have formed an alliance to apply IoT to monitor your home and vehicles in one unified offering.
There are even apps that provide similar telematics information. After all, most of the driving behavior insurers need can be measured by the accelerometer and GPS already embedded in your smartphone.
My experience using the free driving app I downloaded has been fascinating. Drivewise (from Driveway) sends me a text assessing my performance within a minute of finishing a drive. I might be rated as an “elegantly moving top gun” (score 100), “brake riding road roaster”(score 65), or it might cast aspersions on my ability before safely navigating me home. I like the top gun status more of course, but if the app was connected to my insurance company, I’d also pay much more attention to its feedback.
As fun and impressive Driveway is, so far it only knows you’re moving. Not how. You could be a passenger in someone else’s car. Last weekend, I got a stellar rating on my driving when actually I had just finished a warm Sunday ride through the Santa Cruz Mountains on my titanium Bianchi.
The vast universe of connected Things producing Big Data allows other new entrants in the market to threaten the insurance industry from offline distribution through brick-and-mortar agents and call centers to online, direct-to-consumer sales. CoverHound is a marketplace for car insurance: an easy-to-use online comparison-shopping tool and a purchasing experience on the site itself, rather than through an insurer’s clunky interface of fax and phone — or worse, the storefront agent’s office.
Insurers will need to build ‘ecosystems’ (networks of companies, individuals, and institutions that interact and provide services) in order to promote, supply, install, and service connected devices. Insurers also need to be mindful that there are a finite number of relevant potential partners for the new ecosystems that will shape the future of their industry. Read: Get in now or miss the boat.
From a strategic perspective, the key questions for insurers are ‘who will have the data I need in 10 years’ time?’ and ‘who will have the primary -, and more valuable — customer relationships?’
Sensors in cars will provide data about the location and usage patterns of the vehicle and therefore a more accurate fix on the risks of theft and accidents. We will be barraged with data on restaurants, stores, gas stations within our car’s vicinity with low prices, great reviews, special discounts, and more galore. Data analytics have to be able to assess risk behaviors and individual profiles as telematics exabytes spill forth.
Mobility will allow driving consumers to take advantage of these offers as they roll down the road from commute to errands to schools to home with the ease of using stored payment info in a concierge offering that might be called Super-Uber…or Uber-Uber or, maybe, just plain Uber, which was capitalized last year at a value of $17B.
“Put it on my tab” will be the mantra of the connected consumer and, in particular, the connected driver.
Dealing in a transparent market in buying behaviors will disrupt many large incumbent insurers who will not go away easily. They will acquire the right players, develop their own technology and do what they can to be a survivor.
As a consumer of all things, you will be able to “opt-in” (and, yes, be very cautious about privacy intrusion) to have your data in the cloud where it’s married with data analytics and, voila, have a vast, convenient and competitively-priced marketplace of a bevy of consumer offerings. It won’t be more than a few months before drivers will perhaps be thumbing their noses at the traditional auto insurers who’ve perhaps overcharged them by several thousand dollars.
Imagine this! You upload your driving data onto the Internet and say, “Here’s my make, model, mileage, credit score, and driving record. Bid on me!”
If any financial player is willing to be regulated like the insurance companies so that consumers are protected, then the field of entrants is wide open. The data will flow to those agile enough to turn it into savings. Who’s to say you will hear back on a rate quote just from State Farm or Geico or Progressive? The lowest rate might come back to you from some financial entity seemingly as far afield today as…a hedge fund?
The road is wide open. Fasten your seat belts!