By Indrani Nadarajah   |   February 2019    |    10 minute ready

Usage-based insurance (UBI) can be powered by telematics using a plug-in device, a mobile application, or be pre-installed in the car’s network. UBI devices and apps provide insurers with data ranging from how hard drivers are braking and accelerating, to where they’re driving and at what speed. UBI leverages the Hawthorne Effect, which states some people work better – and for purposes of this paper, drive more carefully – when they know they are being observed. UBI rewards safe driving behaviours with lower auto premiums.

A major factor driving the market growth of UBI is an increase in the production of passenger and commercial vehicles that are embedded with telematics. Global Market Insights, a Delaware based organization, estimates that the global UBI market is expected to grow from its current value of US$34 billion to over US$107 billion by 2024.

Proponents say UBI can benefit society by promoting less speeding and safer driving on the driver side, and better claims management on the insurer side, leading to lower costs for both drivers and insurers.

Consumer Attitudes

Last year, a survey of 1,551 Canadians by belairdirect found that a majority of those polled are willing to have telematics devices and/or apps monitor their driving if it means lower auto insurance premiums. Seventy-four percent of respondents said they would agree to use an app that monitors their driving habits in order to receive a “personalized car insurance premium.”

This coincides with the findings of an earlier Willis Towers Watson survey of US drivers, where 81% of respondents – and 93% of millennial respondents – reported they would be willing or open to sharing recent driving data. At 84%, a similarly high number would be interested in, or open to, having a short trial to determine the discount they could get before buying a policy.

Premium discounts should be a big carrot for most drivers. British Columbia and Ontario have the highest auto insurance rates in Canada. In New Brunswick, the Insurance Board recently approved increases that saw premiums go up by up to 25%.

High auto premiums have become a political issue and insurers are under pressure to reduce premiums and are investigating ways to achieve this prudently.

In January, Ontario’s provincial government announced a review of the province’s auto insurance system, consulting with drivers, insurance companies and other stakeholders. Finance minister Vic Fedeli said at the time that the government will create a regulatory framework to facilitate modernization in the auto insurance sector.

Availability of UBI

UBI insurance is currently available in Ontario, Quebec, Alberta, New Brunswick, and Nova Scotia.

Some companies have been offering UBI products for more than five years. Desjardins launched its Ajusto program in 2013 with a black box device that tapped into the car’s on board computer. The company launched a smartphone app in 2015. A 2017 follow-up survey found that nearly 75% of Ajusto customers had improved their driving by avoiding dangerous driving behaviors such as speeding and sharp braking, and 76% also said they feel that Ajusto helps improve road safety.

The Co-operators launched its en-route UBI app in April 2014. Data collected through the app includes instances of sudden braking and rapid acceleration, as well as times of day the vehicle is used, and total distance driven. 

In 2017, Allstate Canada expanded its UBI offering, Drivewise, to Nova Scotia after experiencing “great success” in the provinces of Alberta and Ontario, where the program was launched in 2016.

In July 2018, CAA launched Canada’s first pay-as-you-go program for motorists in Ontario who drive less than 9,000 km a year. Participating drivers install a telematics device into their car that tracks their vehicle's mileage. At every 1,000 kilometres, the driver is billed automatically. 

Intact announced its partnership with TrueMotion, a smartphone telematics platform, last June. Louis Gagnon, president of Canadian operations for Intact Financial Corp., said telematics has been successful for the insurer in terms of differentiating between good and bad risks, and predicting frequency and severity of claims.

For its part, the Financial Services Commission of Ontario (FSCO) said in December 2017 that it has “no studies or reviews that provide actuarial evidence to quantify” the effectiveness of UBI.

FSCO allows Ontario auto insurers to use telematics to reduce rates for good driving behaviours, but not to increase rates for bad driving behaviours.

A FSCO spokesperson recently said that the regulator’s position on the effectiveness of UBI has not changed.  Furthermore, “at this time, FSCO has no plans to issue a revised bulletin on the Usage-Based Insurance program,” the spokesperson said.

Meanwhile, the Autorité des marches, which regulates auto insurance in the province of Quebec, has not placed restrictions on premium setting with UBI, which means insurers can penalize bad driving with increased premiums.

Understanding Consumer Behaviour

A 2017 paper by University of British Columbia and Purdue University researchers reports UBI benefits such as improved driver behaviour and higher discounts, however, there is as yet little knowledge about whether this strategy will actually be beneficial for customers or improve the insurance companies’ profits.

Miremad Soleymanian, a doctoral student at the UBC Sauder School of Business, who was one of the authors of the paper, said the team worked with unidentified US insurance company’s data to better understand consumer behaviour in UBI.

Soleymanian and his colleagues combed through the data to see what impact, if any, UBI had on driving behaviour. They also wanted to see if UBI reduced adverse selection.

The researchers assessed the incidence of hard braking and noted that drivers who were on the UBI program demonstrated a 20% reduction in hard braking daily, even though there was no discernable difference in the mileage driven. The authors also wanted to find out what was behind the improvement in driving, and specifically if it was related to the economic benefit of lower premiums. What they found was that drivers who were more receptive to UBI and changing their behaviour, were typically those who resided in higher premium, no-fault states in the US. They were also younger drivers who were paying higher premiums to begin with.

The authors also highlighted a caveat in that UBI is naturally self-selecting: drivers who know they have poor driving habits are not going to sign up for such insurance. 

One unexpected statistic the researchers noted was that the drop-out rate was quite high; about 35% of participants withdrew from the program before the six months trial was up. The authors offer some reasons for this. It could be that drivers became uncomfortably aware of their own driving flaws. Other reasons could be the inconvenience of using the telematics device, and/privacy concerns about being continuously monitored by an insurance company. The reasons are not yet clear. “We are trying to understand this better so that insurers can better develop monitoring and pricing strategies,” Soleymanian said.

Commercial UBI

The commercial vehicle telematics compound annual growth rate is forecast to reach about 21% for the forecast period between 2017 and 2022, with the largest growth opportunities in the Asia-Pacific region. A primary driver behind this growth worldwide is the increasing government requirement for deploying vehicle tracking in commercial vehicles.

In recent years, commercial lines insurers have struggled with poor underwriting results. There is also a need for greater monitoring of commercial vehicles on the road; in Ontario, one in four fatal crashes in 2017 involved commercial vehicles.

Experts say telematics not only helps identify risky behaviour, but also the type of driver coaching required. Also, excessive events at certain times can suggest employees are under pressure to meet targets, which is contributing to increased risk. Greater oversight does reap dividends for companies and insurers; UK car parts distributor Andrew Page cut accidents and reduced speeding by 97% after deploying a telematics system in its 900 company vehicles. The company also saw an increase in fuel efficiency of about four miles per gallon.

Last year, BlackBerry teamed up with DMC Insurance, a transportation insurance provider, to offer trucking companies better risk management. The companies stated that trucking companies would be better able to improve operations, increase safety and better manage the total cost of risk. As part of this agreement, the companies will develop insurance-based products and services using near real-time data from BlackBerry Radar, such as vehicle location, route and mileage, temperature, humidity, door status, and cargo load state.

UBI in Claims Management

Jason Bayley, President and CEO of Collision Sciences, says the real value in telematics, apart from better underwriting, is in faster claims processing at significantly lower cost to the insurance industry.

Collision Sciences offers insurers a mobile application to extract accident data by providing access to reports directly from data stored on the vehicle’s black box or event data recorder. While FSCO’s view is that “telematics data should be treated as personal information even if it is not necessarily about the driving behaviour of any one identifiable individual,” black box crash data is considered diagnostic and “non-private” in Canada, though insurers often obtain owner authorization as a best practice.

(In the US, the federal Driver Privacy Act, enacted in December 2015, places limitations on data retrieval from event data recorders and provides that information collected belongs to the owner or lessee of the vehicle and consent must be obtained. To date, 17 states have enacted similar statutes relating to event data recorders and privacy.)

Currently, insurance companies have to hire forensic engineers to extract the information from the recorders.

The Collision Sciences solution includes a Bluetooth OBD adaptor and mobile app, which is given to insurance adjusters and body shops. “Our app only collects data from the car’s sensors,” notes Bayley. Insurers can compare the data with what is being communicated by the involved parties, providing key indicators for fraud, severity, settlement decisions, and underwriting.

The Move Towards Mobile Apps

Interactive insurance, regardless of the form that it takes, requires seamless interoperability in order to facilitate more widespread adoption.

Collision Sciences’ Bayley says that UBI is moving towards mobile app solutions even though consumer adoption rates in this country are still fairly low. For the insurance industry, mobile apps are inexpensive and customizable, especially when compared to the on-board diagnostics adapters, but UBI apps have certain limitations when it comes to data accuracy.

According to a 2018 report by Ptolemus Consulting, there are only 5 million active mobile UBI policies worldwide. The slow uptake could be linked to fundamental challenges with smartphone apps. Ptolemus notes that many factors are beyond the insurer’s control, including whether the driver is carrying their phone while driving, whether it’s charged and whether relevant apps are running. Smartphone devices are also not as secure or reliable as embedded onboard devices.

There also appears to be a problem with the functionality of mobile apps. A quick scan of consumer feedback on four UBI apps shows that dissatisfaction runs high among disgruntled drivers, with the apps earnings reviews of between 1.3 – 2.5 stars out of 4 stars. Typical complaints include: the apps incorrectly recording hard brakes (when there were none), high battery usage, and apps “glitching constantly.”

While the insurance industry has made some strides in leveraging the wealth of data offered by UBI, the real challenge has yet to be solved: how to offer consumers a UBI value proposition they can’t resist.