Insurance telematics are fundamentally changing the driver’s attitude to risk. This new generation of InsuranceTech businesses are redefining the moral hazard and making car insurance a valuable co-pilot.
Let’s start at the beginning.
The origins of compulsory car insurance can be traced back to the post war years of the 1920’s. This is the Henry Ford period when the automobile industry took off thanks to mass production, lower prices and installment credit purchase plans. And whilst the low cost Model T Ford set the benchmark for this era, new marques proliferated to suit all tastes and budgets.
It was during this era that many of today’s automotive innovations were introduced. Electric powered cars, four wheel drive, front wheel drive and even hybrid fuel/electric cars were all introduced in the 1920’s.
Up until then, drivers had no liability cover in place for the death or injury that they might cause. And with cars being relatively fast (compared to the horse and cart) and unsafe (compared to the horse and cart), there were no shortage of accidents, injuries and deaths!
Insurance companies seized on the opportunity to provide protection for these expensive assets that needed protecting from damage, accidents and theft.
The UK government was one of the first to introduce legislation with the Road Traffic Act in 1930. This made it compulsory for vehicle owners to have a third party insurance policy to cover their personal liability for death or injury. The Act also introduced the Highway Code and the first driving test.
Which brings us to today. For the past 85 years or so the demand for car insurance has continued to grow with our affection for, and dependence on the motorcar. In 2010, the world surpassed 1 billion cars on the road and still has plenty of capacity to increase further.
And over this 85 years of so, car insurance hasn’t changed much, apart from it has gotten cheaper, relatively speaking. The fundamental principle of the pooling of shared risk underpins the product. The traditional model has the underwriter assessing the risk in the pool based on collective factors such as age, location, driving history, and value of the car.
But of course, in this model, the good drivers subsidize the bad. The low milers subsidize the road warriors. The premium doesn’t reflect actual driving habits, or the actual driving pattern. At best, the traditional model might offer a discount for a low mileage driver.
This approach has encouraged a poor attitude of personal responsibility because someone else is picking up the tab. It is moral hazard in its most basic form!
But we are on the cusp of a fundamental shift in attitude by drivers and consumers. Insurance telematics has taken hold and is already disrupting car insurance markets, with Italy, UK and USA leading the way.
According to the Insight Report published last October, the estimated market size at the end of 2013 was $4bn in gross written premium. Furthermore, global sales of telematics products is forecast to grow at a CAGR of 80% between 2013-2018.
In the UK, Ingenie changed the market for young drivers when it was launched in 2010. It was so successful that within a couple of years of trading it was valued at over £100m. At the time, the “black box” gadget that was installed in the car (used to collect the data from the car) was associated with big brother.
A snooping device for Mum and Dad to keep tabs on their 18-year-old son!
But Ingenie changed this perception and made it cool to insure with Ingenie through their use of Gary Lineker as brand ambassador. Ingenie educated the market with the concept of the black box as the co-pilot, rather than a spy in the car. They were also smart and intuitive about their young target market. How to get through to the still developing brain of a young male driver influenced how they built the dashboards and the way they communicated with them.
Which is a great example for all start-ups about really knowing your customers!
There is no question that Ingenie fully understood theirs, and in a remarkably short time, they changed the attitude to risk for a young generation of new drivers.
Already, this space has moved on and there are now two different insurance models that are emerging for insurance telematics – the Pay-as-you-Drive (PAYD) model and the Pay-per-Mile (PPM) model.
They are different in that the PAYD model uses the data collected from the car to monitor the driver’s driving style and behavior. The driver’s behavior is used to adjust the premium. For example, heavy breaking is a high risk factor that will push premiums up. As will driving in peak traffic, speeding or urban areas where collisions are more frequent than on motorways.
By contrast, the PPM model, does not take into account driving behavior. PPM has a low basic monthly charge that is linked to traditional factors such as the value of the car and driver history. Over and above that the driver pays for every mile driven at a flat rate, say 3cents per mile.
The first to market in the US with PPM was Milemeter, who launched in Dallas, Texas. However, they didn’t stay the course and went under in 2012 because they couldn’t compete against the established traditional insurers in the area. Lack of sufficient funding also played a significant part in their demise.
Following in their footsteps is Metromile, the only PPM insurance provider currently in the US. Targeting the low mileage, urban driver, Metromile are licensed in 3 states on the West Coast and in Washington State.
Their gadget, the Metromile Pulse, is easily installed by the driver, straight into the on board diagnostics port that comes as standard in every car in the US (since the late 90’s).
The app that goes with the Pulse is key to how Metromile have changed its relationship with the driver. Traditional car insurance is bought once a year and the policy is stored for safekeeping, only sought out in the case of an incident.
But with Metromile, the driver runs an insurance app on their smartphone that connects with the Pulse on every journey. This smart driving app reports on the data from the car to help the driver make informed driving decisions, such as how to improve fuel economy.
The app also feeds drivers with important information such as street sweeping alerts or where they left their car. The app even provides a map and directions on how to find your car!
And for drivers who don’t have insurance with Metromile, they have the Tag, which wirelessly connects to the driver’s smartphone via iBeacon technology. The Tag delivers the same features to the smart app and allows the driver to test drive the app without having bought the PPM insurance, getting them hooked and enabling customer conversion!
A claims service is provided 24/7 and promises to take the hassle and aggravation away for the driver. They also provide a car doctor service for drivers to contact if they are concerned about the car’s well being.
These additional features and functions are all aimed at improving the customer experience, with customer service at the heart of the business proposition.
Oh, and before I forget, Metromile provide car insurance! And in a great piece of market positioning, they’ve integrated with Uber.
For Metromile drivers who are also Uber drivers, the app automatically detects the start and finish of an Uber journey. The driver pays on the Metromile PPM policy only for their personal miles and not for their Uber miles. These are covered by the Uber commercial agreement for the miles on the Uber trip.
This functionality to differentiate between Uber and non-Uber miles is seamlessly integrated into the Metromile app. Given that both Uber and Metromile’s target audience occupy the same urban space, this is a genius move to increase take-up and increase the stickiness of Metromile.
Technology is changing our attitude to car insurance. Not only is it changing driver’s attitude to risk, which should ultimately make roads safer, it is also changing our attitude to the insurance product itself. With the kind of service and information now available to the driver, the insurance product is becoming the driver’s co-pilot and you won’t leave home without it!