August 27, 2014 by Regan Reid
Imagine a morning when you get into your car to head to work and your car navigates the stop-and-go traffic while you relax and read the paper. It may seem like some faraway sci-fi fantasy, but driverless car technology already exists. Though perhaps the most extreme example of how technology will affect consumers’ driving experiences — and, in turn, the insurance industry—it’s not the only example. Today, usage-based insurance (UBI) is changing how consumers purchase auto insurance and it is flipping the traditional underwriting model on its head.
Telematics devices, which are either installed in a consumer’s car or plugged into its diagnostic port, typically monitor how a consumer drives (speed, sudden acceleration, hard braking, etc.), when they drive (late at night, during the day, etc.), and how far they drive. Insurers then use the customer’s driving behaviour data to determine the customer’s monthly premium. With UBI, consumers no longer pay a premium based solely on their age, gender or other traditional rating factors. “[People] want to pay for their behaviour, not the behaviour of everybody [else],” says Suzanne Michaud, vice-president, support and governance, at Industrial Alliance.
UBI programs present the industry with a number of opportunities, but also serious challenges. For the broker—the traditional intermediary between consumer and insurance company—the obvious obstacle that UBI presents is how easily it suits the direct model. “If you go with the [direct model], they put a box in a consumer’s car, then the communication channel backwards and forwards on their resultant risk profile and how it impacts their insurance policies [is] between the consumer and the insurance company, and not the broker,” says Colin Simpson, CEO of Independent Broker Resources Inc. (IBRI). Brokers, therefore, must adapt their value proposition to compete in this new insurance landscape. Because telematics will shake up the industry—and other, potentially more disruptive, technology is on the way. “It’s a case of we better climb on board and embrace it, figure out how to deal with it, or we’re just going to get passed by,” says Paul Cleveland, vice-president, Insurance Advisory Services at KPMG.
When it comes to UBI offerings in the marketplace today, Canada is behind other countries, including the US and the UK, which have both offered consumers various UBI products for several years. We may be late adopters, but Mark Breading, a partner at Strategy Meets Action, says Canada will catch up quickly. Though the Financial Services Commission of Ontario (FSCO) currently has its hands full dealing with the 15% auto rate reduction, many industry experts predict that more insurance companies, including Intact, will get approval to launch UBI programs in Ontario—where currently Desjardins is the only player—and other provinces this year. “I’m expecting as many as half a dozen Canadian insurers to enter the market, or announce that they’re entering the market, in 2014,” says Breading.
Quebec-based direct writers Industrial Alliance and Desjardins were two of the first insurance companies to offer UBI policies in Canada—and their early adoption presents some obvious threats to the broker channel. Firstly, both insurers say that the majority of their UBI policyholders are new customers that were attracted to the companies specifically because of these products—a clear threat to brokers who have already seen directs slowly eat up their market share yearover-year. Joe Daly, Desjardins General Insurance spokesperson, says that close to 50,000 customers have signed up for their UBI offerings, Ajusto and Intelauto, since they were launched in May 2013. Moreover, both companies fully anticipate that the number of UBI policyholders will continue to grow as Canadians learn more about telematics and UBI policies. In fact, Michaud says that since Desjardins has entered the UBI market, interest in Industrial Alliance’s product, Mobiliz, has increased—Desjardins’ marketing for its products has helped to increase consumer awareness of telematics offerings, she argues, which is a good thing for any company with an offering. Lastly, Daly adds that the consumers that receive a significant discount (the average Desjardins consumer is earning a 12% discount on their auto insurance, he says) are more likely to stay with the company. “Once you’ve got a customer who is getting a decent discount, they’re really reluctant to leave you. It’s a way of locking in good customers, which is what all insurance companies want to do,” he says.
Realizing that telematics and UBI are a reality facing the industry that can’t be ignored, and acknowledging that the broker channel has been slow to adopt technological solutions—to its detriment—in the past, the Insurance Brokers Association of Ontario (IBAO) has announced its plans to get ahead of the oncoming telematics tidal wave. The IBAO’s wholly owned subsidiary, IBRI, has developed a telematics offering with Quindell, which it has proposed to 15 of the major Canadian carriers, and which will be available to insurance companies and brokers across Canada. “We have sat by and watched companies develop multiple portals, multiple ways of doing business. That is very onerous on the brokerage force,” says Doug Heaman, vice-president of the IBAO. “We wanted to come out with a single solution that would fit with every company that [chooses] to embrace it, and brokers would only have to understand one product, which we think is very important.” IBRI hopes that its telematics offering will not only be valuable to brokers, but that it will also help consumers see the value of purchasing a UBI policy through the channel.
The IBRI telematics solution is unique in a few important ways. First and foremost, it creates a role for the broker in the purchase of a UBI policy. With the IBRI solution, consumers can download Virtual World, a mobile app that is part of the offering. Among other things, the app can monitor consumers’ driving habits—without having to install a telematics device in their car—and give drivers a base score on their driving behaviour. Consumers can then speak to their broker and, based on their own driving score, get advice from the broker on which UBI policy from which carrier is best for them. “For example, if the telematics product is low-mileage and the person’s score indicates they drive a large number of kilometres a year, then you know that’s not a match,” explains IBRI’s Simpson. Craig Weber, CEO of Celent, stresses that UBI policies offer brokers another opportunity to provide valuable advice to consumers. “This is a new area that is daunting to customers, and a good broker will understand the options in the market and be able to explain them clearly,” he says.
A second important distinction of the IBRI solution is that, unlike direct offerings, consumers will own their driving data. The consumer would first be asked to give the broker access to the data, which is stored in the IBRI’s data warehouse. Once the consumer chooses which insurer to purchase a policy from, they then give the broker permission to give the insurer access to that data. That means that the broker is still the intermediary between company and client. Additionally, if the consumer has a policy with Insurance Company A and decides they’d like to switch to Insurance Company B, the broker can switch “the data feed” from Company A and the consumer can take all of their data with them to Company B. (Though a unique proposition that distinguishes the broker offering form that of the directs, Intact’s offering also gives ownership of the data to the consumer.) Consumer protection and data privacy are the real cornerstones of the IBRI offering and one major reason for this is that the majority of brokers’ customers are of a generation that is less willing to share information (according to the IBAO’s “Understanding the 21st Century Insurance Consumer” report, most broker customers are over 40, and 30% are over 60 years of age). Many industry experts say that consumers are more confident around sharing personal data today than they were in the past. This is especially true of younger consumers who grew up in the Facebook era. (For more on the privacy issue see “Perspectives on Privacy”.)
Lastly, IBRI hopes the offering will allow brokers to provide more value- added services. “We could unlock your car for you. We could e-test your car for you because we’re getting that data out of the [telematics device] as well,” suggests Heaman. David Gallagher, vice-president of marketing at Quindell, adds, “These are things maybe that a customer doesn’t initially think about with their insurance carrier, but as the brokers introduce these things and talk about how the whole connected car can emerge, I think there are lots of opportunities.”
Simpson expects that the IBRI product will be made available in the second or third quarter of 2014. Though he can’t name which insurers have agreed to sign on, Heaman adds that it “will be embraced” by companies. Small to mid-size companies that might not be able to afford the costs of implementing a telematics program are particularly excited by the IBRI offering, says Gallagher. There are, however, some kinks that still need to be worked out with carriers that have already developed or are planning to develop their own telematics devices. “The question that I think needs to be answered is how [do] we work with other devices other than our own?” asks Tracy Laughlin, vice-president of personal lines, Ontario and Atlantic, at Intact Insurance. She stresses that Intact is supportive of IBRI bringing a telematics device into the marketplace, but the company still needs to determine how they can support this offer and accept data from other sources. In an email, Heaman responded: “We have not yet worked out the details, however our concerns are around consent, who owns the data and portability, all of which are unclear if we are using a company-based product.”
Despite some remaining logistical issues, IBRI has been busy promoting the product to brokers across the country. So far, broker reaction to the initiative has been mixed. “We’ve had ‘Bravo. Great job. We need to embrace this,’ ” says Heaman. “And we’ve also had responses of, ‘What are you doing? We don’t want another thing on our plate that we have to deal with.’ Both of those responses are valid.” But, he adds, “We as brokers need to adapt and innovate or we’re going to be left behind.”
Of course, offering a telematics solution is only the first technological adaptation brokers—and the entire industry—will need to make. There is evidence that the feedback drivers are provided from their telematics devices on their driving behaviour can actually help improve their driving. “Ingenie [a UK-based telematics insurer] has proven over the last number of years in the UK that, through their communication capability with their policyholders, they have reduced the frequency of claims, but more specifically the severity of claims,” explains Simpson. It’s commonly believed that fewer and less severe claims will eventually lead to lower car insurance premiums—and, therefore, less commission for brokers. “I think it’s a fair assessment,” says Heaman. “But the insurance industry continually has transformed and found other products…I don’t think it’s a concern in the near future.”
Though telematics may, in the long run, reduce premium dollars, the technology also offers brokers and insurers new opportunities to add value-added services, as well as interact with customers. “Those that do offer UBI programs will find themselves in a deeper and more interesting relationship with their customers. They’ll have significantly more touch points, on an annual basis, at which they can interact with customers,” says Jamie Rodgers, vice president of consulting services for CGI. Telematics devices also offer brokers an opportunity to connect with a segment of consumers that the channel has had little success attracting. “The opportunity for the brokers is to get to these young people whom they’ve never engaged with before. Young people want to interact on a more regular basis. They’re used to interacting through technology, they want instant feedback,” says KPMG’s Cleveland.
Heaman says 2014 will be “the year of telematics,” but ten years from now, how will technology have changed the insurance industry? “I think if we look at five to ten years down the road, telematics is a small step into what could be a very quickly changing landscape,” says Intact’s Laughlin. “I would say within a ten-year window, every new car that is sold…will have safety features that will fundamentally improve insurance risk—lessening bodily injuries, lowering collision and damage costs, lowering litigation costs, all those things,” says Celent’s Weber. Safety improvements, though undeniably beneficial for society, could create a potentially more difficult landscape for insurers and brokers to operate within. “We do feel as an auto insurer that…through things like telematics and sensors and safety systems, our business is going to shrink in the future, because there will be far fewer accidents,” says Desjardins’ Daly. “Eventually, maybe we’ll just insure your car for a tree limb falling on it, or maybe some problem with a sensor and it gets in an accident, but once we reduce the human factor more and more, there will be far fewer accidents [to insure].”
Copyright 2014 Rogers Publishing Ltd. This article first appeared in the February 2014 edition of Canadian Insurance Top Broker magazine
This story was originally published by Canadian Insurance Top Broker.