Social justice and usage based insurance
by Joseph Weinstock
Whether you are a socialist or a capitalist, it is very easy to fall in love with the social justice of usage based motor insurance because it is so fair. Every policyholder pays according to his standard of risk. A careful driver will pay a far lower premium than a dangerous driver. It is a fair and just method that puts an end to the era of cross-subsidies and drives motor insurance a long way forward.
Usage based insurance, or PAYD or PPU is linked to an electronic "box" that collects, stores and transmits data on the way the vehicle is driven: distance, journey times, speed and also exceptional driving occurrences. The insurance premia are influenced by driving safety, as reflected by the data collected.
This method of insurance is already being marketed elsewhere in the world by forward-looking insurance companies and in fact, according to the international consulting company Ptolemus, there are currently about 60 insurance companies around the world that are offering usage based insurance, some commercially and others in pilot stages. The leaders are in Britain, Italy and the USA. Israel is currently lagging far behind.
In this paper I shall briefly review different examples of usage based insurance from the USA and Britain; I shall touch on the advantages and challenges of the concept; and finally I shall refer to its possible implementation in the Israeli market.
Britain and the USA
If you own a motor car in the British Isles, you will be amongst the first to benefit from usage based insurance. You will be able to do so through specialist brokers or directly with insurance companies. Here are a few examples.
Wunelli is a broker that offers usage based insurance via its "Coverbox Panel" with the insurance companies Alliance, Admiral, Sabre and Co-Operative that it represents. Another broker, Insurethebox, also offers usage based insurance with an emphasis on distance travelled. Its basic package includes approximately 10,000 kms a year but additional 400 km packages can be purchased for an additional premium. Moreover, drivers who have established careful driving patterns receive a bonus of additional kilometres.
Another British broker, iKube, which represents several insurance companies, offers a different format of usage based insurance. It uses the electronic box to enforce a curfew in order to keep drivers off the road during the dangerous hours between 11 pm and 5 am. Young drivers who install the box and undertake the night curfew benefit from a very significant discount but if they break the curfew, as emphasised in the policy, they pay an expensive penalty, all under the control of the box.
The Co-Operative is a large British insurance company that offers unique insurance to young drivers. At its own expense the company installs a smart box in the insured vehicle and its policy is computed quarterly. The premium alters every three months depending on driving quality, as measured by the box. The data that the company takes into account are speed on different routes, strength of braking and acceleration, daily distance travelled and cornering speed. The company undertakes to send feedback on the driving quality to policyholders and to let them know in advance of premium changes. The premium is reduced for careful drivers, but dangerous driving will lead to an increase in the premium the following quarter.
Progressive is an American insurance giant that has even registered a patent in respect of usage based insurance. It sends the electronic box to its policyholders in the mail together with instructions for easy assembly. After six months` driving linked to the box the insurance company notifies the policyholder of the rate of discount that has been computed for him, the policyholder returns the box to the company and benefits from the discount so long as he stays with the company.
For the sake of objectivity, mention should also be made of failures.
In 2006 a British insurance company Norwich Union, which has now been acquired by Aviva, conducted a large-scale pilot which was closed in 2008 because of insufficient sales.
As can be seen from the different examples, there is a wide range of ways in which the wealth of information provided by the "box" can be utilised in the discretion of the insurance company as regards the most important data for predicting future accidents.
Advantages and Challenges of Usage Based Insurance
Advantages for the policyholder - coaching and educating young drivers; driving improvement by the deterrent of the box; warning parents by SMS of dangerous driving; and a substantial premium discount for careful drivers.
Advantages for the insurance company - a huge leap forward at the actuarial level (drawing an analogy with medicine, it is like moving from the x-ray age to the CT era) the box makes it possible to obtain valuable data for underwriting, claims and customer service; an improved claims ratio is made possible, together with improved profitability; usage based insurance contributes to the brand as being dynamic, service-orientated, progressive and green. Most important of all, it increases market share without reducing prices.
Alongside the advantages there are also a few challenges -
Correctly loading the cost price of the box and the service on the policy premium is a challenge. The intricate integration between policyholder, insurer and the telematics service provider has complex legal and practical aspects which, although soluble, are a challenge. Moreover, the wealth of data that is supplied to the insurer and sorting the wheat from the chaff are a challenge. In addition, there are privacy aspects and patents in certain countries.
In this context mention must also be made of regulation, and here the good news. In my personal experience, the position of the commissioner of insurance has ranged from favourable to enthusiastic in respect of this type of insurance, presumably because of its fairness.
When Will It Come to Israel?
Israel is well represented amongst the international hi-tech companies that develop and manufacture the smart box. Generally speaking, it can be said that the hi-tech companies are far ahead of the insurance companies. They are already working on developing the next generation of box which, apparently, will become a smartphone application.
However, the natural partners, Israel`s insurance companies, are still finding it difficult to digest the technology and are lagging behind. To the credit of the Israeli market, mention should be made of two trials in this sphere, one by the insurance company Arieh, which in 2005 produced a per-kilometre plan together with Paz Oil, and the other by Menora in 2010, in conjunction with the fuel company, Sonol. Neither trial proved successful.
Nevertheless, the successes outnumber the failures and as described here many companies are going places in this novel area. They are benefiting from the advantages of being first, collecting customers and valuable information and gaining an advantage over competitors.
Which will be the first insurance company to present usage based insurance in Israel? It is difficult to predict but it is likely to have the following characteristics:
An insurance company with those characteristics, combined with independent professional backing will be able to present a usage based motor insurance plan within six to eight months of making the decision.
Ultimately, progress cannot be halted. The insurance industry will embody the technology sooner or later and usage based plans that offer fairer insurance will become industry standard. The first companies to enter the sphere will be the biggest winners because the rewards of originality and breakthrough are priceless.