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Big Data and Predictive Analytics

Objective Auto Insurance Pricing

Dale Halon | June 23, 2017

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Maps app on cell phone

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.


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.

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