M2M enables better auto insurance models
In part 2 of a 4-part series on the emerging M2M, Connected Planet explores how wireless telematics is changing one specific industry: automotive insurance.
Part 1 of the series, on the carrier’s new role in M2M, can be found here.
In the highly competitive industry of automobile insurance, the differences between premiums are one of the single biggest ways insurers differentiate themselves. In a new effort to maximize its customers cost benefits, Progressive (NYSE:PGR) has turned to an unlikely source: wireless machine-to-machine communications.
Progressive has been scaling up a commercial pilot program called MyRate that uses a M2M device plugged, custom-designed by Xirgo, into a vehicle’s on-board diagnostic port to transmit information about a customer’s driving habits back to the insurer. The application tracks any number of factors from the frequency and intensity of breaking and acceleration to the time of day driving occurs as well as the overall mileage driven in a month. Depending on how much of the driving is deemed safe or low-risk by Progressive’s computers, the driver can qualify for steep discounts on his or her premiums.
“Customers value more competitive prices,” said Richard Hutchinson, general manager of MyRate, which is now available to customers in 15 states. “The question is do they deserve more competitive rates. MyRate allows us to make that judgment by measuring the quantity and quality of their driving.”
Hutchinson said Progressive doesn’t view MyRate as a replacement for traditional insurance policies, which calculate premiums via age-old actuarial tables and driver history, but the program is an optimal alternative for a driver who feels he's outside of the traditional risk profile for his demographic group. Teenage drivers, for instance, tend to pay much higher premiums than older drivers due to their age group’s inexperience and tendency to engage in much riskier behavior on the road. But the rare teenage driver that drives cautiously or infrequently could use MyRate to prove himself the exception. Drivers with checkered driving pasts but who have reformed their ways—or so they believe—would also be ideal candidates for the program.
Other potential beneficiaries aren’t so obvious – say, a driver who lives in a high-risk urban area but drives rarely or keeps to suburban roads, or a driver with a high-performance sports car that always keeps under the speed limit. Essentially, if you can use MyRate to prove that your driving behavior and circumstances are less risky than that of peers, you pay lower premiums, Hutchinson said.
While MyRate is primarily intended to give Progressive a new discounting weapon in the insurance price wars, Hutchinson acknowledges that such programs have the potential of radically changing the way insurance works. In principle, insurance works by spreading risk around: Payments are drawn from the premiums of all the insured regardless of whether or not each individual payer is involved in accident. While the insurer adjusts those rates according to formulas designed to determine who is at greater risk of an accident, those formulas have their limits. They’re based on generalizations about where a driver lives, his age, sex, what kind of car he drives and his history of accidents and moving violations. Drivers who fall outside that actuarial mold can wind up subsidizing the riskier behavior of others or find their own riskier behavior subsidized.
But by using M2M to track the real behaviors of drivers, insurers can track the real behaviors of their customers rather than the general behaviors of a demographic group. The more the pool of participants grows, the more precise an insurer can assess their level of risk relative to their peers and adjust rates accordingly. So far, Progressive is only adjusting rates downward. If a driver actually drives more haphazardly than his premiums would merit, Progressive won’t actually raise his rates, Hutchinson said. But not only the potential but the impetus for that type of highly precise and personalized insurance is there.
“There is an element of the insurance business that is social policy,” Hutchinson said. “For those that are more of a burden on the system, there’s a notion that they maybe they should pay a higher freight to use it.”
The culmination of such a social policy would be an insurance policy that charged customers by the mile, factoring in not just the distance driven but the type of road traversed, the time of day and even the number of passengers in the car. A mile driven on uncongested roads on a Sunday afternoon might cost only 1 cent in premiums, while a mile driven at 2 AM with three passengers through rain downtown streets might cost 25 cents or more.
To accomplish this type of real-time insurance billing, though, an insurer would have to track its customers’ location at any given moment, and that means GPS. Currently, the Xirgo Technologies-designed M2M device doesn’t include a GPS receiver. Rather than analyze data in real-time, the device collects information from the car’s computer and sends it intervals to Progressive’s databases where it is analyzed cumulatively and used to calculate an overall discount at the next billing period.
While GPS would greatly refine the data an insurer could analyze (showing, for example, whether a driver is going 55 mph on a highway versus a residential street), Hutchinson said Progressive has no plans so far to add the functionality to MyRate. The insurance industry faces a highly fragmented regulatory environment with each state’s insurance board calling the shots within their borders. While many of those insurance boards are receptive to the idea of ‘pay as you drive’ insurance premiums, many of them are drawing the line at using GPS to track exactly how you drive.
“The biggest obstacle to GPS right now is privacy,” said Kris Kelkar, president and CEO of Xirgo. There is no technical issue or cost issue to embedding its tracking device with GPS—Xirgo has done it with many other types of devices. The problem raised by privacy groups is how that information would be used both as a means of discriminating against drivers who don’t participate in a program or for other purposes entirely unrelated to insurance. California—where Progressive doesn’t offer MyRate—is the perfect example of such a conundrum. California has passed legislation that requires insurance companies to set rates based on annual miles driven as well as driver history and demographic factors, which, at first glance, would make it ideal for ‘pay as you drive’ programs. But efforts to implement such programs have encountered opposition from privacy groups such as the Electronic Frontier Foundation, which claim that any customer data collected could be abused.
Using M2M in insurance is still a new relatively untested market, though, and it is bound to raise privacy concerns until it gains wider acceptance in the consumer mindset, said Mike Ueland, vice president and general manager of Telit Wireless Solutions, the module supplier for Xirgo’s M2M devices. Ueland pointed out that OnStar is a GPS-powered vehicle service that has gained wide acceptance. And while some states are trying to limit the uses of GPS in cars, other states are trying to expand them. Local and regional governments in six states are running pilot programs using GPS and M2M technology that would levy highway taxes based on miles driven rather than the gallons of gasoline consumed. GPS in vehicles may still be a hot-button issue, but the consumer and government attitudes toward it our changing, Ueland said.
“We’re still early on in this market,” Ueland said. “Someone like Progressive is going to be very specific in how they use the technology. But the thing about the Xirgo device is it can be fairly quickly optimized for any type of solution.”
While US insurers haven’t yet tapped into the potential of GPS, international operators have. One of Brazil’s largest auto insurers, Porto Seguro, now requires all of its customers to have an onboard GPS-M2M device, to help the police recover a vehicle if it is stolen, said Peter Fowler, Americas president for Cinterion Wireless Modules, Siemens' former mobile telematics unit and now the largest manufacturer of GSM modules in the world. Brazil’s legislature is weighing a bill that would extend that GPS requirement to all vehicles, though it is encountering some opposition from privacy groups, Fowler added. In the US and other parts of the world, car dealers are using GPS for their own insurance purposes, requiring GPS to be embedded in any car financed by the vendor to make it easier to repossess if the owner defaults on the loan.
The insurance and other industries are finding numerous uses for the combination of M2M and GPS in the vehicle, Fowler said. In fact, M2M devices linked to car’s diagnostic system has the potential to become a platform, on which developers can design any number of applications. Fowler doubts that such a platform would become truly open given the few companies that control the vehicle telematics market today, but through partnerships an M2M device originally installed for a single purpose could end up hosting multiple apps, ranging from security, tolling and even onboard entertainment, Fowler said.
As for the ultimate insurance app, per-mile billing, though, the momentum has stalled, Fowler said. Insurers in multiple countries have been trialing GPS-enabled insurance tracking programs for years. “Not much has come of it,” Fowler said. “But where there is smoke, there is fire. The concept is still being kicked around. They continue to work on the business models. There’s no question that paying for insurance by the kilometer or mile driven will take off sometime in the future—just not right away.”
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