Customizing Car Insurance

Usage-based auto insurance is an idea supported by both common sense and scientific research. Where, when and how people drive their vehicles can affect their likelihood of getting into an accident. Therefore it makes sense to look at these important components as factors in how auto insurance rates are set for specific clients, notwithstanding such traditional categories of age, gender, type of vehicle and driving history.

However, to date, only a handful of insurance companies, such as Aviva Canada and Progressive Casualty Insurance Company, have experimented with pilot projects that measure when and how far certain customers drive. In North America, the concept is gradually being tested to see if it will really work in assessing accurate premiums – and if consumers will buy into it.

“We believe that over time this approach can produce more consistent rating, in which consumers can only look to their own driving habits,” Bob Fitzgerald, Aviva’s executive vice president and CEO, says. “We think this can be a better, more granular approach to rating. At the end of the day, it is fairer and that is ultimately what customers deserve.”

DRIVING DOWN PREMIUMS

Aviva Canada is the sole Canadian company employing usage-based insurance through a program called Autograph. Launched officially in October 2004 (but implemented starting last year), Autograph is currently sold through 14 brokers to Ontario clients only. It is billed by Aviva as “the first insurance program in Canada to reward responsible drivers with lower premiums.”

Here’s how it works. The Autograph program features a small “telematics” device that can be easily installed in a vehicle; it measures how often, how and when the vehicle is driven, and records information about acceleration and braking. It does not record where the vehicle is driven. Drivers can plug the device into the onboard diagnostics (ODBII) port present in most cars manufactured after 1996. The ODBII port, which is located right under the steering column, exists in almost all later-model cars. The U.S. Environmental Protection Agency made its installation mandatory in new vehicles built for sale in the United States and Canada for the purposes of emissions testing and monitoring. The port communicates with the majority of electrical components in a car.

Aviva customers participating in the project are provided with software that can transfer data from the Autograph device to their personal computers. They can review driving behaviour and see if they qualify for a discount of up to 25% on their premium. However, clients participating in the program will not see their rates increase because of the information. Once the customer has used the device for four months, he or she is invited to send the information to Aviva Canada. Clients who choose to “upload” this data will automatically receive a discount of 5% on their insurance for the next six months. Both the device and the software are provided free to project participants.

“There is no penalty for not uploading the data to us; consumers retain full control to make the decision whether or not to share their data,” Jennifer Power, the project leader for Autograph, says. “Project participants like the fact that they have control and choice. They also like the fact that Autograph is fair and individualized. The discount is based on how you drive, when you drive and how much you drive. These are the things that have really resonated with consumers.”

For the time being, Aviva is not disclosing how many consumers are enrolled in the Autograph program. Power, who is Aviva Canada’s senior vice president, Atlantic region, says the project is still in the “pilot, or research, phase.”

“During this phase, we are really trying to understand and evaluate the customer value proposition, ” she says. “We want to make sure we have everything right before we do a broader roll-out.” Other likely spots for expansion are Atlantic Canada and Alberta.

PERSONALIZING AUTO PREMIUMS

One of the biggest challenges with a new rating program like Autograph is education and consumer perception, Fitzgerald says. “It is so different in a market where you have a regulated product and everyone is selling pretty much the same thing,” he says. “This does stand out as something different, both in terms of our brokers and the public. There is an explanation and education process that you have to address. But once you do, the momentum really builds. The adoption rate and the data uploading rates are very much in line, if not higher, than we expected.”

Power agrees “getting the message across to consumers is difficult, but our brokers are helping to explain the fairness of the experience. Another issue for us is that this represents a whole new way of collecting and analyzing data.”

Capturing this kind of data involves researching and verifying whether time of day, distance driven and other factors lead to higher accident rates. “Logically, if you think about rush hour traffic, there are more cars on the road, and if you are driving during that time, the risk of driving is higher than driving Sunday morning to church,” Power says. “So it is really just about what types of situations you and your vehicle are in, and there is actuarial data to support that.”

In a 2004 study for the Victoria Transport Policy Institute, researcher Todd Litman noted that “the data show that crash rates increase with annual mileage in virtually all categories . . . Mileage is not the only risk factor, but it clearly has a substantial impact.”

Similarly, an Atlanta-based study by the Georgia Institute of Technology for the U.S. Department of Transportation stated: “Researchers agree that increased driving exposure typically leads to increased crash risk…Afternoon rush hours, from 4 pm to 6 pm in Atlanta (especially on Friday), are the worst time to be on the road with respect to crash frequency.”

Aviva’s Autograph program may sound familiar to anyone who has paid attention to the development of usage-based insurance in North America. Ohio-based Progressive Casualty Insurance Company was the first insurer to experiment with the concept in an initial pilot project in Texas in 1998. That project involved a telematics device that had to be retrofitted into customers’ cars. It also incorporated global positioning satellite (GPS) and cellular technologies, which measured not just how and when the vehicle was driven, but where.

“The project in Texas got us into the game, if you will,” Dave Huber, Progressive’s TripSense project manager, says. “It answered the question: ‘Will consumers go for this?’ The answer there was yes. Consumers understood the reason why an insurance company would want to use that kind of data to price more accurately. In the consumers’ eyes, the rate they pay is more personalized.”

Huber notes the initial project provided useful information about driving patterns, helped in pricing segmentation and lowered rates for many drivers. “We felt like it helped us price,” he says. “We figured the person who drives ‘x’ miles during the day is less of a risk than the same person who drives the same number of miles during late evening or night. We figured out that time of day did matter. Everyone had a suspicion, but we were able to verify that. We also showed that people who drove 7,000 miles were a different risk than those who drove 15,000 miles.”

The problematic issue in Texas was the technology infrastructure and cost required to run the project. “We realized with the cost of the technology that maybe we were a little ahead of our time,” Huber says. “It was kind of expensive, and we decided that it wasn’t anything that we would roll out right then. But we learned a lot from it.”

In 2002, Progressive revisited the idea of usage-based insurance and began research on another project. This new endeavour used less expensive and less intrusive technology.

The new TripSensor device records information from the ODBII port in later-model
vehicles. Certain this was a more cost effective way to better understand the link between driving behaviour and the risk of being involved in an accident, Progressive launched another project in the state of Minnesota in 2004. The ongoing project now involves close to 4,000 Progressive customers, who voluntarily participate and are eligible for discounts.

Huber says Progressive has expanded its research efforts to include 20,000 customers across the U.S. who have installed TripSensor devices in their vehicles. “We are collecting lots of data and the objective is to use that data to model behaviour and identify specific types of safe or risky behaviour,” he says. “We would like to incorporate some of this data into our pricing methodology.” The company expects to have a good understanding of the Minnesota-based data by the third quarter of this year, according to Huber.

TOURING WITH TELEMATICS

Progressive holds two U.S. patents for its method of determining the cost of auto insurance using vehicle usage data. In fact, Aviva Canada purchased a licence to use Progressive’s business process of telematics for its Autograph program. “We have exclusive rights for Progressive technology and business process in Canada for the next 20 years,” Fitzgerald says. “Essentially, we have a strategic alliance with Progressive to co-develop this in North America as a fairer and more customer-specific rating offering in the marketplace.”

Aviva Canada’s sister company in the U.K., Norwich Union, also purchased the business patent from Progressive and launched a “Pay-As-You-Drive” program in 2005. This system takes the concept a step further and uses GPS technology to calculate monthly insurance premiums based on how often, when and where customers drive. Research commissioned by Norwich Union revealed that nine of 10 people in the U.K. would prefer their car insurance to reflect the usage of their car and the type of journeys they make. Its pilot project has already been fully subscribed, with an estimated 5,000 cars retrofitted with the telematics device.

The use of telematics is gaining widespread recognition in some countries, such as the U.K. Beyond insurance, it is seen as a form or measuring and potentially changing driving behaviour to address traffic congestion, smog pollution and trip frequency.

For insurance in North America, usage-based insurance is an intriguing idea that is struggling to get a foothold in the market as a unique rating plan. It still presents many questions. For example, should car insurance be transformed from a fixed (or “sunk”) cost to a variable cost depending on driver mileage and behavior? Is this something governments and regulators will examine as traffic congestion and smog pollution increase in urban areas? How could this potential public policy option affect insurance profitability and company market share?

Perhaps the biggest issue for insurers, which has yet to emerge from the various pilot projects, is how to treat clients who consistently demonstrate high-risk driving behaviour. “That is the hardest question for us to answer right now,” Huber says. “You want to price better but you have to grow the business. I don’t know how that will play out at this point, but it is a big learning curve for us. You want to deliver the right rate but you can’t scare off people.”

This is one of many questions that representatives of Aviva Canada will also ponder as they continue to research and potentially broaden the reach of the Autograph program.

“With our Autograph program, right now nothing happens with high-risk behaviour,” says Fitzgerald. “But going forward, the more Autograph devices there are in vehicles, the more people will be paying a rate commensurate with how far and how they drive. Frankly, if this concept takes hold, I think awareness of the link between driving behaviour and insurance premiums would make the roads safer for everybody. I think people would drive with their pocketbooks in a higher point in their mind.”