(Image credit: Dollar Photo Club.)

Usage-based auto insurance (UBI) is still an emerging business area, but insurers are already exploring new ways to use telematics and data to more precisely price auto risk. This R&D may pay off in the long run, but for now the most profitable avenue may be to focus on a single rather plain and relatively easy metric to secure—mileage.

UBI products have generally been enabled through telematics, or telemetric data about factors such as speed, acceleration, braking and turning. The data is typically collected by an insurer-provided, after-market device compatible with a vehicle’s OnBoard Diagnostic System (OBD II). The data is then used to determine whether a driver is eligible for a discount during a given contract period. Recent developments show that carriers are thinking beyond this standard model.

For example, patents filed by State Farm suggest that the carrier is examining the potential use of factors and techniques that would enable trip-based insurance, according to a recent report by Amy Danise at Nerdwallet. The patent applications discuss “vehicle use units” that drivers could buy in advance and apply to a given trip. “Much like buying tokens at an arcade, where some games cost more than others, drivers would buy ‘units’ and would have to consider whether a particular trip is worth the insurance cost,” Danise writes, quoting State Farm patent application language for clarification:

For example, a trip on a snowy night with three teenage occupants may cost more than a trip of equal length by a middle-aged vehicle operator on a sunny day.

The Nerdwallet story also notes that Progressive filed a patent application in 2012 regarding an insurance pricing system that would use input from vehicle sensors that measure the risk of a given road traveled, as well as use of seat belts and signals, and compliance with traffic signals. Travelers filed a patent last year that would price based on the geographical risk of routes taken, according to Danise. “Risk zones” would take into account police reports for various hazards, along with other information that could result in recommendations to use or avoid certain routes at different times of day.

These approaches manifest more than one disruptive trend in insurance. They show insurers’ exploration of use wider sources of more granular data for pricing, including on a real-time or near-real-time basis; they also show the insurers’ appreciation of the potential to use such data to power services that proactively interact with policyholders to prevent losses.

Short-Term Direction

Of course, while the patent-filing activities of major insurers may signal the longer-term direction of the industry, the question at hand is whether the approaches represent the most practical short-term direction for usage-based insurance.

Metromile, a San Francisco based auto insurer, has built its customer value proposition on the factor of mileage.  The reason, explains Dan Preston, the company’s CEO, is that, “mileage explains approximately 60 percent of the variance in auto insurance risk overall.” He adds that the number-one risk indicator for drivers is how often they’re on the road. “Because of this, at Metromile we believe that traditional insurance isn’t fair to low-mileage drivers so we charge simply by the mile—if you drive less, you pay less for insurance,” he says.

Metromile collects mileage data through its proprietary OBD II plug-in, Metromile Pulse. In addition to mileage-based insurance products, Metromile offers services through its Metromile Pulse app, including the following

• Car health and access to Metromile’s on-site mechanic
• Commute optimization
• Car location
• Customizable trip logs
• Mileage tracking for expense reporting
• Driving trends
• Street cleaning notifications in select markets

Metromile also offers non-policyholders access to its app via its new Tag device, a low-energy Bluetooth device placed in a user’s car that connects to a smartphone.

Among other carriers focusing on mileage is Ohio Mutual (Bucyrus), which recently signed an agreement with mileage analytics company True Mileage. The carrier will receive mileage information from Carfax and then processes it through True Mileage’s Discount Analytics solution to set mileage discounts.

Emergence of Smartphone-based UBI Data Collection

However, smartphone app-based collection is emerging as a more direct and current method of gathering mileage information. Earlier this month, Verisk Insurance Solutions announced that it had entered into an alliance with Vehcon (Atlanta) to collect validated vehicle readings for insurance rating, underwriting and UBI programs. The vendors have developed a solution called OdometerConfirm, which allows insurers to capture odometer readings via a policyholder’s smartphone. OdometerConfirm combines Verisk’s data and analytics resources with Vehcon’s process for collecting VINs and odometer data.

“Miles driven is an important nationwide rating factor for many auto insurance writers and is a mandatory rating factor in California,” notes John Cantwell, VP, Auto Underwriting, Verisk Insurance Solutions. “While annual mileage is an established predictor of loss costs, it’s always been one of the more difficult rating factors to confirm accurately and maintain through the life of the policy.”

Verisk’s partnership with Vehcon can be seen as support of consumer data capture by industry service bureau ISO, which supplies rating information to the P&C industry, suggests Martin Ellingsworth, president of Salt Creek Analytics, a Dana Point, Calif.-based supplier of the Fresh Miles smartphone app-based analytics offering for UBI.

Significant Coverage Gap in Existing UBI Offerings

“This critical endorsement for verified mileage will open up the market for all states and carriers covering personal and commercial auto insurance,” he says. “It confirms a significant gap in the coverage of existing UBI initiatives, especially for consumers such as those who have older cars or simply travel less.”

Salt Creek Analytics’ Fresh Miles offering gives insurance carriers a solution for consumers who want to get an appropriate rate for their time on the road but either have an older vehicle without an OBD II port or regard telematics devices as invasive of their privacy, according to Ellingsworth. The process is based on a captured photograph of a vehicle’s odometer, followed by processing through Fresh Miles’ proprietary analytics.  In contrast to the Verisk/Vehcon model, Fresh Miles works directly with information the policyholder supplies, while applying techniques to ensure a high degree of verifiability from the customer source, according to Ellingsworth.

(Related: Q&A: Salt Creek Analytics’ Case for Smartphone App, Mileage-Based UBI)

Mileage is the single most important factor in driving behavior that should affect an understanding of risk and premium, affirms Stephen Applebaum, managing partner, Insurance Solutions Group (Chicago). “No other factor comes close to having the value of mileage,” he says.

Applebaum describes the evolution of usage-based auto insurance as beginning with devices, followed by the use of the much more efficient smartphone-based applications, and then to on-board capabilities included in the automobile manufacturing process that are adequate for multi-factor telematics analysis.

Smartphone Efficiencies

“OBD-ready plug-ins are expensive—along the lines of $75.00 for insurers to buy and send out,” Applebaum notes. “Smartphones have no cost to the insurer, and OEM capabilities have no significant costs, but auto makers will charge insurers or intermediaries for telematics for data.”

One might ask why insurers would bother buying it, if mileage matters as much as it does. However, Applebaum suggests that we should think of the current phase of UBI as experimental. He notes that the UBI/telematics supplier market is currently undergoing consolidation. In addition to the Verisk/Vehcon partnership, CCC Information recently acquired DriveFactor, and LexisNexis bought Wunelli. For the time being, insurers may well focus on mileage, even as they experiment with other factors, Applebaum acknowledges. That’s because the importance of mileage is currently better understood. The future may bring new insights into the dispositive power of other factors gleaned through telematics, and indeed of preventive risk management services that carriers are likely to increasingly offer. “Underwriting used to be retrospective, based on data from the past,” Applebaum says. “Now underwriting is becoming more responsive and personalized—among the underwriters, everybody is learning about what factors are going to be dispositive, and to what degree.”