TELEMATICSBRENDA WELLS, PH.D., CPCU, AAI, CRIS

RISK EDUCATION STRATEGIES / EAST CAROLINA UNIVERSITY

INTRODUCTION

TELEMATICS DEFINED

¡ interdisciplinary field that encompasses

¡ telecommunications

¡ vehicular technologies

¡ road transportation

¡ road safety

¡ electrical engineering (sensors, instrumentation, wireless communications, etc.)

¡ computer science (multimedia, Internet, etc.)

PRACTICAL APPLICATION: VEHICLE TRACKING

¡ Monitoring location, movements, status and behavior of a vehicle.

¡ Achieved through

¡ GPS receiver and electronic device installed in the vehicle

¡ PC or web-based software that communicates with dispatch, emergency or other coordinating unit.

¡ Accurate to 10 yards in the US

¡ European Space Agency has technology accurate to 1.5 yards.

PRACTICAL APPLICATION: TRAILER TRACKING

¡ Tracking movements, position, and even the temperature inside the trailer ¡ Very commonly-used with cold-storage freight trailers.

¡ Sensors can trigger alarms and record an audit trail for business purposes.

¡ Similar technology is used in freight containers for ¡ Increased security

¡ Scheduling/rescheduling of delivery

PRACTICAL APPLICATION: FLEET MANAGEMENT

¡ Started being used in the mid-1990’s. ¡ Includes a range of functions, including

¡ Vehicle financing ¡ Vehicle maintenance ¡ Tracking and diagnostics ¡ Driver management ¡ Fuel management ¡ Health and safety management ¡ Scheduling

¡ Helps to reduce risk for a business that heavily relies on transportation

PRACTICAL APPLICATION: SATELLITE NAVIGATION

¡ Uses a GPS and electronic mapping tool to

¡ Locate a position

¡ Plan a route

¡ Navigate a journey

¡ GPS was originally for the military, but has been made available for civilian use

¡ A serious catalyst for the development and use of telematics!

PRACTICAL APPLICATION: AUTO TWO-WAY GPS COMMUNICATION

¡ Developed heavily in the 2000’s

¡ Examples ¡ GM (Onstar) ¡ Lexus (Link)

¡ BMW (Assist) ¡ Capabilities

¡ Remote diagnostics ¡ Roadside assistance

¡ Directions and navigation information ¡ Emergency response ¡ Stolen vehicle location services

PRACTICAL APPLICATION: INTELLIGENT VEHICLES

¡ Can provide warnings about safety hazards, road conditions, etc.

PRACTICAL APPLICATIONS: AUTO INSURANCE

¡ How “Usage-Based Insurance” (UBI) Works ¡ Driver behavior is monitored directly. ¡ Information is transmitted to the insurance company. ¡ Insurer assesses driver risk and charges premium accordingly.

¡ Monitors the car’s engine control computer to determine ¡ Distance driven ¡ Speed ¡ Time of day ¡ Braking force ¡ Cornering ¡ Acceleration

¡ Trials conducted in Europe found that 18-23 year olds who used this technology had 20% lower accident rates than average.

UBI TECHNOLOGY

UBI TELEMATICS AUTO TECHNOLOGY: FOUR WAYS TO USE IT

¡ Dongle

¡ Black Box

¡ Embedded

¡ Smartphones

TECHNOLOGY: DONGLE

¡ How it Works ¡ Installed by consumer ¡ Provided by insurer

¡ Advantages ¡ Low cost ¡ High reliability of data on location and driving style ¡ Re-usable ¡ Turns on with car’s ignition

¡ Disadvantages ¡ Can only be used in modern vehicles ¡ Subject to tampering and fraud (since it’s not hard-wired into the car) ¡ Becomes obsolete very quickly

TECHNOLOGY: BLACK BOX

¡ How it Works ¡ Professionally installed ¡ Has its own sensors, plus it uses the vehicle’s internal sensors ¡ Very popular across Europe

¡ Advantages ¡ Provides VERY in-depth and detailed data on driving behavior ¡ Excellent rapid notice of accidents (first notice of loss (FNOL) services) ¡ Provides valuable information for forensic crash reconstruction and claims investigation

¡ Disadvantage ¡ Most expensive because of high installation and administrative costs

TECHNOLOGY: EMBEDDED

¡ How it Works

¡ Automatically built into the car ¡ At the end of 2013, 11 car manufacturers had embedded telematics

¡ Advantages ¡ Provides lots of services, from roadside assistance to FNOL ¡ Improved customer relationship management ¡ Allows automobile product differentiation for manufacturers ¡ Potentially lower costs of product recalls

¡ Disadvantages ¡ High-cost (most are subscription based)

¡ Lack of standardization ¡ Compatibility with insurance solutions ¡ Rapidly become obsolete (usually obsolete by the time the car hits market)

TECHNOLOGY: SMARTPHONES

¡ How it Works ¡ Phones are already equipped with lots of sensors (GPS, accelerometers, and gyroscopes). ¡ Insurers develop “apps” for the phones to manage UBI

¡ Advantages ¡ Phones have lots of storage and communication capabilities ¡ No device, installation or data connectivity costs to insurers ¡ No additional cost to the consumer ¡ Phones are powerful computers, lowering data handling and storage costs ¡ Large manufacturing volume of phones makes price affordable

¡ Disadvantages

¡ The quality of data and reliability of data ¡ Accelerometer data is not calibrated ¡ Gyroscopes have to be constantly adjusted based on phone position

EXAMPLE: PROGRESSIVE’S SNAPSHOT

¡ Plugs into the car’s OBD II port (a “Dongle”) ¡ Monitors

¡ Time of day you’re driving ¡ Braking ¡ Distance driven ¡ Acceleration (although this does not affect your insurance price, it does give you information on it) ¡ Speed ¡ Location (sometimes)

¡ Gives you feedback on your driving so you can improve ¡ Used in cars made after 1995 ¡ Currently offered as a ‘trial” product.

¡ If you find that it won’t save you money, you can just send it back.

EXAMPLE: ALLSTATE’S DRIVEWISE

¡ Very similar to Progressive’s Snapshot

¡ The Drivewise app also provides tools ¡ Feedback on your driving after each trip ¡ Insights on your driving patterns

¡ Tips on how to stay safe behind the wheel ¡ Optional tools and services:

¡ In-trip alerts for speeds 80 mph and over for hard braking events ¡ Automatic text reply to let others know you're driving (Android only)

¡ Roadside assistance ¡ Mechanic locator ¡ Parking reminder (find you way back to your parked car)

THE AUTO INSURANCE MARKET

THE U.S. AUTO INSURANCE MARKET

¡ Largest insurance market segment in the U.S.: $170 billion

¡ Fiercely competitive as insurers try to attract the more profitable low-risk drivers

¡ Hundreds of insurers compete for the same premium base, which is not growing.

¡ As vehicles and roads become safer, premiums are falling.

TRADITIONAL AUTO INSURANCE UNDERWRITING FACTORS

¡ Are typically dependent on “exposure-related” driving variables that are not necessarily primary contributors to risk

¡ These are not actual risk indicators, but rather proxies for risk

TRADITIONAL AUTO INSURANCE UNDERWRITING FACTORS

¡ Territory (location of car, traffic patterns, accident rates, cost of living) ¡ Make and model of car ¡ Mileage (may not be accurate, as reported by insured) ¡ Age of Driver

¡ For drivers under 25, we also use ¡ Gender ¡ Marital status ¡ Student academic performance

¡ Driving record ¡ Operates under the assumption that past driving performance is an accurate predictor of future driving performance. ¡ Also may not be accurate

¡ Example: Texas and North Carolina have pretty big loopholes to get out of traffic tickets

OTHER HEAVILY-DEBATED RATING FACTORS

¡ Education

¡ Occupation

¡ Credit Score

Criticism: Heavily penalizes those with lower incomes and lesser education, who tend to pay more for auto insurance than others.

TELEMATICS MODELING AND ANALYTICS

¡ Today:

¡ Few (if any) insurers base the entire premium on just telematics (actual driving behavior)

¡ Most still largely rely on the traditional proxy variables such as territory, age, etc.

¡ The idea behind telematics is to actually measure actual risk on an individual level, versus the traditional proxies

TELEMATICS: PREDICTIVE MODELING TYPES

¡ Type I

¡ Relies on total mileage, time of day, and a set of predefined “events” such as harsh braking or acceleration. ¡ The event counter records the number of “events” ¡ Problem: How do you define which “events” are dangerous?

¡ Type II: ¡ Collecting granular data on a second-by-second basis and then researching lots of different vehicle operational characteristics.¡ Example:

¡ Observe distribution of g-force when changing heading by more than 45 degrees at more than 45 mpg ¡ Does this result in more insured losses? If so, it could add to our predictive model.

¡ Much better for analysis ¡ Can identify variables quickly ¡ Can test on historical data already collected

THE PREVALENCE OF UBI

¡ 2014: 8.5% of consumers had a UBI policy in force

¡ 2013: 4.5% of consumers had a UBI policy in force

¡ More than half of the major insurers in the US have an active telematics UBI program

¡ The major providers of telematics solutions wrote approximately $79 billion in total auto insurance in 2013 (but that includes traditional and UBI policies)

¡ Some studies predict insurers will receive more than 25% of their premium revenue from telematics-based insurance by 2020.

THE PUSH FOR EARLY IMPLEMENTATION

¡ The first telematics device a consumer involves will likely be their last.

¡ The consumer does not currently own their data ¡ It will be hard to shop for a more competitive price from another insurer compared to the one they

have with UBI. ¡ Early adopters will bring in good drivers and can give them the cheapest prices

¡ Late-comers to the UBI game will face adverse selection ¡ Those who are the worst drivers will be all that’s left for insurers that don’t offer UBI.

¡ Even when UBI is adopted, they will be behind in attracting good customers. ¡ Right now insurers tend to not charge for increases in risk detected with UBI, but as UBI becomes

common across insurers they will have to.

ADVANTAGES OF UBI

¡ Evidence exists in Canada, the United Kingdom and the United States that driving behavior is improved with UBI programs.

¡ Using actual vehicle operation has proven to be significantly more predictive of expected loss costs than proxy variables ordinarily used for auto ratemaking

¡ As proven by the Towers Watson Driveability score, which is advertised as “three-times” more accurate than other rating methods.

ADVANTAGES OF UBI FOR CONSUMERS

¡ Lower insurance premiums ¡ Particularly important to lower-income drivers, whose auto insurance is often more than their car payment

(even with a clean driving record). ¡ Especially beneficial for low-mileage drivers, who often subsidize high-mileage drivers.

¡ Enhanced safety and improved claims experience ¡ Riskier drivers get educated on what they are doing “wrong”

¡ Add-on services such as roadside assistance & immediate driving feedback ¡ Insurers will rely less on controversial factors like credit scoring and education ¡ Gives the policyholder more control over their price for insurance

¡ Can drive less or drive more safely to reduce their insurance rates

ADVANTAGES OF UBI: FOR INSURERS

¡ Reduced claim costs

¡ Better risk pricing

¡ Mitigation of adverse selection and moral hazard

¡ Modification and reduction of risky behavior

¡ Improved brand recognition and loyalty

ADVANTAGES OF UBI: FOR SOCIETY

¡ Drivers who use UBI drive fewer miles, thereby reducing ¡ Accidents ¡ Congestion ¡ Fuel consumption ¡ Carbon emissions ¡ Dependence on fossil fuels

¡ Brookings Institute: ¡ tying insurance costs to miles driven would reduce miles driven by about 8%. ¡ 8% reduction in miles drive =

¡ net social benefits of $50-$60 billion in reduced accidents and road congestion ¡ 8% reduction in gasoline consumption ¡ 126 ton reduction in carbon emissions = 2% of the US carbon emissions in 2006 ¡ 4% reduction in U.S. oil consumption

¡ Overall safer roads

UBI DISADVANTAGES/CONCERNS

¡ Concerns about insurance affordability, especially in economically disadvantaged neighborhoods

¡ Will insurers eventually force us to use these devices?

¡ Will the methodology behind UBI be revealed?

¡ The black box technology currently in force does not automatically help consumers learn how to drive safer.

¡ For UBI models to encourage safer driving, the link between driving behavior and pricing must be transparent and clearly understood

¡ For now, insurers are keeping their models secretive and proprietary.

¡ Privacy issues

PRIVACY CONCERNS

SNAPSHOT’S PRIVACY POLICY (RETRIEVED ON 7/4/16)

¡ When We May Disclose the Data to Others¡ We will not share personally identifiable Snapshot data with any third parties, unless it's necessary or

appropriate to service your insurance policy, detect or prevent fraud, perform research, or comply with the law. For example, such data may be disclosed:

¡ when we're legally required to provide the data, such as in response to a subpoena in a civil lawsuit or by police when investigating the cause of an accident;

¡ to a state department of insurance to support renewal rates;

¡ to service providers who are contractually required to maintain its confidentiality; and/or ¡ as otherwise required by law.

We may share de-personalized Snapshot data more broadly. De-personalizing the data means that we remove personally identifiable information so that the data cannot be associated with a particular driver or policyholder.

STATE FARM’S DRIVE SAFE & SAVE PROGRAM

¡ “State Farm will only share policyholder information as required by law and as stated in the State Farm Privacy Policy.”

ALLSTATE’S DRIVEWISE

Your Privacy11. What information does Drivewise collect?¡ The app collects information that enables calculation of safe driving behaviors associated with speed,

braking and driving time of day. You'll be notified in advance if we plan to change the data we use to evaluate your driving.

12. Who can see my Drivewise information?¡ The trip route map viewable in the app is seen only by you, the app user. No location services

information is available to the people servicing a policy. Information used to evaluate driving performance is viewable to you, your Allstate agent and customer service representatives who help service your policy.

THE CHALLENGE FOR REGULATORS

¡ How do you balance

¡ The desire for privacy AGAINST

¡ The value of allowing consumers to voluntarily join programs where their data can ultimately lower their insurance costs, improve fuel consumption and save lives?

IN AN ACCIDENT

¡ UBI data may be helpful to the insurer, the insured, or both.

¡ Will insurers restrict the access to this data to only those situations that help them?

¡ Will data be readily available to consumer if it is advantageous in a claim?

THIRD PARTY VENDORS

¡ Many insurers are using third party vendors to record, transmit, receive and report driving data.

¡ Example: Towers Watson Driveability program

¡ This leads to more privacy concerns…

¡ How is the information processed by the vendor?

¡ How will it be formatted and stored and protected from misuse?

THE NAIC’S CONCLUSION

FROM A CONSUMER AND PUBLIC POLICY PERSPECTIVE

¡ The development of telematics has been a “market failure” ¡ Regulators should

¡ Establish data ownership and privacy standards ¡ Establish standards for permitted and prohibited use of consumer data

¡ Investigate and prevent the use of prohibited risk classification factors such as race and income ¡ Establish standards for disclosure of telematics results and rating programs to ensure consumers get the feedback

necessary to alter their behavior ¡ Make sure that insurance rate filings contain all telematics rules and discounts, as well as the methods employed to

capture the driving behavior

¡ Where insurers use different devices for different cars and drivers, regulators should confirm that the same data is obtained for every participant and that all potential discounts are made available to all participants.

QUESTIONS?BRENDA@RISKEDSTRATEGIES.COM / 252.481.2777