Economical opts not to move forward with usage-based insurance right now

Economical Mutual Insurance Company has no plans to move forward with telematics and usage-based insurance (UBI) at this time in light of quickly changing technology and as-yet unidentified factors that will ultimately drive adoption.

Economical, which has closely studied and continues to monitor telematics and UBI, in fact, is ready to move, according to Karen Gavan, the company’s president and chief executive officer.

That said, “we’re not pushing it forward at this time because we think the technology is changing so rapidly and its adoption is probably going to be driven by things much broader than the cost of insurance,” Gavan said.

“While telematics has the potential to change the insurance landscape and give consumers the power to change their behaviour, its real potential can be far greater than just managing your insurance rates,” she argued, citing as an example businesses and municipalities that have adopted telematics technology to improve productivity, not lower insurance rates.

Despite the wait-and-see approach on telematics and UBI, that does not mean Economical has no plans to invest in technology. “Our consumers are looking for more use of technology, like mobile applications. We need to make those investments going forward,” Gavan said.

Innovation is happening quickly on the technology front, she pointed out. “I can tell you that we are not standing still and hope to have more to share with you in the coming weeks regarding investments we plan to make to not merely keep pace with that change, but to be at the forefront of it,” Gavan said.

Economical undertook its business transformation program, beginning in 2012, to improve the efficiency and effectiveness of the company’s operations. “In a remarkably short period of time, we have streamlined and simplified how we do business by improving our productivity. This is essential to delivering service to our broker partners,” Gavan said.

The goal of the program was to reduce Economical’s operating expenses by $60 million (the equivalent of 20% of operating expense base) over two years. By the end of 2013, she reported the company had achieved close to 80% of its overall expense reduction target and is on track to complete the program in 2014.

But there are challenges ahead, including Ontario auto and weather-related losses. “Ontario auto is going to challenge profitability as we were mandated to take some of the largest rate reductions. The industry, as a whole, cannot meet the political commitments for a 15% rate reduction without the government following through on its commitment to introduce measures that reduce costs,” Gavan emphasized.

She added, however, that she is “encouraged by the commitment the new majority government in Ontario has pledged to implementing the necessary cost reductions.”

As for the weather, with “the increase in the frequency of major weather-related catastrophe losses, it is clear that climate change is having a profound impact on our business,” Gavan said.

“Canada, as a nation, (needs) to be better prepared to handle the reality of the severe, pervasive and irreversible impacts of climate change,” she noted. But industry alone “cannot be the flood insurance provider without substantive commitment and change from all levels of government, and the implementation of changes that will proactively address the growing risks.”

Governments must invest in infrastructure to handle the changing climate, there needs to be education about mitigation and effective disaster planning, and there has to be a backstop to the industry on absolutely catastrophic events, Gavan argued. “An industry-wide catastrophe program — involving insurers, government and consumers — will likely be necessary to help manage risk accumulations that already exist.”