Driver telematics/usage based information (UBI) is available from a variety
of insurers. Some are based solely on mileage, some add driving behavior, and
some add even more detailed data such as the movement of your cell phone in the
car, indicating it's being used while driving.
Insurance companies have also been using information about population or
traffic density, commute patterns, elevation, weather patterns, and locations
of businesses to understand more about the immediate area around where a person
lives. But is that all there is? What else could they consider?
The Map App
Despite living in Columbus, Ohio, for quite a few years, I still use my
smartphone map app as I drive around town. Mostly, I use it when heading
downtown or having to go through downtown as there are several alternative
routes. You never know where there might be an accident or other congestion on
my "go to" route. Truth be told, I absolutely like the
shortest/fastest route as I prefer to maximize my free time.
My map app is even more valuable when making long drives. I like to plan my
trip as well as possibly avoid congestion, even searching out potential food
stops or attractions along the way. Work travel takes me to all corners of the
country and Canada, so I have become especially reliant on having it guide me
to clients, hotels, eateries, and back to the airport. When traveling to parts
unknown, I often have no idea of where I am because the lack of "big
picture" paper maps we used to use.
Even locally, I turn to my map app. Consider a typical Friday night. We have
a great night planned, taking advantage of an evening out at the end of an
action-packed series of the normal life challenges. Our plan is to end up back
in the downtown entertainment area for dinner after a stop at a charming new
restaurant in the burbs for an appetizer. Being Friday at 5:30 p.m.,
there's likely to be traffic congestion along our route to the first stop
and potentially the second as I noted there's a sporting event near our
dinner destination.
I fire up the app a couple of minutes before leaving the house to see what I
can learn about the best directions to our first stop. All is good! While a bit
slow, my "go-to" route looks good, so we head out and have a
wonderful evening as planned.
Traditional Insurance Pricing
Traditional auto insurance coverage is great for most of us. It covers us
regardless of how much we drive and wherever we drive. Of course, we must abide
by (or purchase by back endorsement) some usage and territorial exclusions, but
they're reasonable and not a burden on most peoples' lives.
Insurers have achieved precision in pricing coverage for most people. They
have loads of data as well as very smart actuaries and modelers to set accurate
prices for large groups of people using the latest analytic tools and data.
Coverage is granted prospectively once we meet our insurer's basic
underwriting criteria. The pricing is set to cover us during the agreed upon
future period of coverage by considering averages of driving experiences for
demographic and average anticipated territory of operation. The price of
coverage will only change if we change residence, add/change vehicles or
drivers, or change coverage limits. Other than that, we have the promise with
us of the same price.
Therefore, I can drive my vehicle(s) staring at the teeth of danger (busy
times of the day, more hazardous routes, as far as I want to go, etc.). Or, I
can choose the timid method by avoiding parking in strange places, rush hour,
and busy intersections. I can use Uber or choose not to take the "holiday
family truckster" on vacation. The coverage is there based on my
insurer's educated guess about its exposure during the time covered by my
premium based on their expectation of average.
Auto Insurance Premiums Based on Exposure
Consider the pricing of auto insurance for most of the exposures covered by
today's mainstream auto policy other than most of the "Damage to Your
Auto—Other Than Collision" coverage (sans colliding with a deer, etc.).
The rest of the policy exposure can easily be rated based on current telematics
data overlaid to mapping technology. GPS can additionally consider both the
environmental factors and the current condition factors that expose us to
loss.
Let's think about my night-on-the-town scenario described above. The
scene changes slightly in that, before embarking, my smartphone app tells me
how much it will cost me to drive the fastest route. It might even offer me
alternatives such as projected changes in 30 minutes or an hour. It might offer
me alternate routes and suggest the best place to park to minimize my exposure.
Of course, the ultimate cost of driving would be based on actual choices made.
When I go on vacation, I can precalculate the cost of driving based on route
and time of day. As an additional measure, the calculation can consider who is
behind the wheel if such information can be made available.
Now consider this same type of cost analysis for car insurance. This type of
auto insurance pricing could not be more objective. Each person can make their
own decision on where they drive, when they drive, and how they drive. The
premium determination algorithm would be based completely on exposure, turning
a blind eye to demographics and many other traditional pricing determinants. Of
course, vehicle age and value would still be needed for calculating exposure.
Information such as gross vehicle weight, the number of doors, type of engine,
or safety accessories and other physical features would still play a role but
have different influence when combined with usage. Again, however, each person
makes their own choice of vehicle.
Pricing Adoption or Roadblock?
Change is never easy in our business. However, telematics and other UBI
programs are becoming more and more common. Consumer-based insurance scores
stood the test of acceptance and are now mainstream. Complete objectivity and
personal choice are the key selling features of this concept. While driving
records and claim history might still be exposure influencers, consumer credit
would likely go the way of the paper map.
Pricing algorithms based on many of the physical environment and
accompanying driving exposures have been in use and approved by many insurance
departments (e.g., see ISO Risk Analyzer Personal Auto).
Statistics on hazardous roadways are widely available. Admittedly, data must be
collected and weighed for its usefulness and acceptability, but this journey
has been navigated successfully in the past as new ideas and new technology
become available. I view these questions as part of the checklist toward
adoption versus a roadblock.
Conclusion
Frankly, for some time I have expected a convergence of these two
technologies, combined with others, to create auto insurance pricing based
completely on the use of the car. The data is available to know specific
locations of up-to-the-minute traffic congestion, accidents, construction, and
prevailing speeds. All this information is used today in most of the mapping
applications on smartphones … and it can be used to objectively price auto
insurance as well.