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This blog is focused on providing information on Pay As You Drive car insurance in Australia. If you find any information, papers, news articles or websites that we should add, please let us know!

Monday, April 13, 2009

A study by Quality Planning proves Pay-As-You-Drive

Quality Planning Corp (an ISO company) has published a study that shows Pay-As-You-Drive works in a pretty compelling way. They studied close to 500,000 cars over a three year period, and found that cars who drive less cost up to 44% less to insure than normal. That proves that if you drive your car less than the average, you are most likely subsidising others when you are paying your insurance premium. Not a good deal.

The following graph shows the results from Quality Planning's study:

The study compellingly proves the benefit of Pay-As-You-Drive for consumers. Sadly, the multiple prisoners' dilemma facing insurance companies means it will be a long time before consumers have more than just one or two providers meeting their needs. In Australia Real Insurance has been providing Pay-As-You-Drive insurance for close to a year, and is still the only provider.

The full article from Quality Planning Corp can be read here. Some quotable quotes from the write-up:

"the recent study reveals why both consumers and companies get a better deal when auto insurance premiums are calculated in relation to miles driven."

"During today’s challenging economic times, many consumers are driving less — and as a result, they expect their auto insurance premium to fall. However, many insurers are simply not able to respond to that dynamic."

"Clearly, annual mileage should be a major determinant of auto insurance pricing. And drivers who drive less should be rewarded accordingly."

"Today, it’s easy to integrate accurate annual mileage verification into the auto underwriting process, using the best available techniques. Insurers who do so will certainly outperform their peers.”

Thank you to Todd Litman for sending out this information. For very comprehensive information on Pay As You Drive see Todd's TDM Encyclopedia.

Julian Beardsworth from EMB gives 10 reasons to switch to telematics

EMB is starting to be a commentator on Pay As You Drive. Julian Beardsworth (bio) posted a news item on their website recently that gives a good old fashioned list of 10 of making the case for telematics. It is a good list (I particularly like point 5...):

Ten reasons to switch to telematics
When Norwich Union put its pay-as-you drive insurance scheme on hold some observers concluded that it was just one of those ideas, like the hovercraft, that catch the imagination but ultimately disappoint. Julian Beardsworth of EMB thinks otherwise. He believes that telematics-rated motor insurance is inevitable, desirable and will appeal to customers. Here are his ten reasons why

1. It works
All drivers can spot high-risk driving both in themselves and others. Reckless, unskilled and over-cautious driving are dangers that can be observed every day. So it’s hardly surprising that using telematics to monitor when, where and how we drive can differentiate high-risk from low-risk drivers to a remarkable degree. Norwich Union reported a 30% drop in claims costs for telematics, which implies that it doubled the quality of risk assessment. Any insurer having twice the ability of its competitors to underwrite and price risk can take the market by storm.

2. It’s getting cheaper and cheaper
Everyone is familiar with the reality of “Moore’s Law” that computer processors double in power every eighteen months. Similar observations have been made about data transmission capability and data storage. At the same time, computer costs are reducing in real terms. EMB’s observation is that telematics hardware and data transmission costs reduce by a factor of six every five years. A telematics device that cost £300 in 2003 could be delivered for £50 in 2008 and is heading for £8 in 2013. At some point soon the economics switch to “why wouldn’t you?” rather than “why would you?”.

3. DIY installation
Up to now the cost of installation has been prohibitive, but not any more. A solution has been found in the form of a device that is mailed to the customer and simply plugs into the OBD II port – a standard on cars sold in the EU since 2000.

4. DIY re-installation
And when people change their cars the telematics device unplugs from one and plugs into the other – it sounds trivial but is another massive shift in the economics of telematics.

5. Telematics doesn’t have to be invented in the UK
High-risk and low-risk driving look the same the world over. So, when an insurer cracks open telematics risk assessment in an insurance product in the US or Germany or South Africa, it could very soon migrate. Telematics technology could easily move into the “plug and play” space in the UK and everywhere else, and it would require little or no modification. It only takes someone somewhere in the world to make it work for it to come to the UK.

6. And that someone might just be Progressive in the US
Progressive may have already cracked it. Progressive are a focused motor insurer and one of the largest players in the US market. They’ve had two forays into telematics on a pilot scale, but now they’re rolling out a telematics product countrywide – authorised and selling in ten states and counting. Of course, they could be calling the industry’s bluff, but they have a strong track record of successful innovation. Insurers doing nothing about telematics today are effectively betting that Progressive will fail.

7. Customers like telematics
Safer drivers know who they are and will buy telematics so that they can benefit from their lower risk rating. The threats to privacy cited by politicians and the media are politically correct and perceived to be populist – but everybody knows that simply carrying a mobile phone already reveals your location. And the protection given to data by law is something that no commercial enterprise can afford to let slip. How many times have details about the location (as opposed to the content) of a mobile phone call made for embarrassing headlines? I can’t remember a single instance.

8. It makes driving safer
People drive more safely when they are being monitored. The evidence so far is that cars with telematics have fewer accidents. The very fact of being observed brings about improvement. I’ve had telematics in my own car and, yes, it changed the way that I drove.

9. It decommoditises motor insurance and improves customer relationships
Individual customers will ultimately get individual prices with telematics insurance products, using personalised data. And the way that customers are identified as suitable for telematics will encourage behavioural and values-based marketing. This offers insurers a platform on which to build stronger customer relationships.

10. It cuts claims costs
Having details of the time, speed and driving actions can help claims handling. Fraudulent whiplash claims from third parties have been successfully challenged by demonstrating that the collision was at a snail’s pace. Stolen vehicles can potentially be tracked down. Disputes over liability will be simplified.

Julian Beardsworth is a director at EMB, the actuarial and business consultants.
Julian.Beardsworth@emb.com

Some other EMB posts:
2. Telematics in the fast lane (a briefing paper)

Saturday, April 4, 2009

World-wide Insurance Activities against Climate Change

The Ceres report on Insurer Responses to Climate Change has just been published. It is an updated version of the same report published 2 years ago. The report states that the insurance industry is in the front line of Climate Change, and the report makes for interesting reading.

Ultimately the Insurance Industry's interest in climate change lies in the volatility of underwriting experience. That means the losses caused by large scale natural events. In Australia we've experienced significant losses over the last 2.5 years, starting with the floods in Newcastle, and including the Blacktown hail, Brisbane floods, Victoria fires, and just large scale storm activity. In the long term the Insurance Industry needs to be profitable in order to attract capital. It therefore needs to deal with events causing losses. If the long term trends are changing, the industry needs to respond if it wants to stay profitable.

From a society perspective, we want to improve our disaster resilience. I have been amazed by the response to the Victoria Fires. It clearly was a terrible event and affected people in a most horrible way. The response to it has been overwhelming. The money raised for the event in a very short space of time nothing short of incredible. Nothing can ever replace the lives that have been lost, but the society will do a relatively good job of restoring the property damage. Insurance played a big part in that.

Contrast that with the widespread floods and destruction in Myanmar in May 2008. Some 90,000 people are known to be dead, and another 50,000 just missing. The natural disaster quickly turned into a man-made disaster with the poor handling by the Myanmar government of aid, and actually being slow or reluctant to issue visas for foreigners coming to help. A terrible example of a disaster against which the world was not resilient.

From the Ceres Report, some points of interest:
The scope of activities identified is wide. It ranges from disclosure, to product innovation, to carbon offsets, to industry participation, to leading by example.
The Ceres report identifies 643 specific activities from 246 insurance entities from 29 countries. A 50% year-over-year increase. The number of product innovations increased by a factor of 2.5, and is the biggest contributor to the increase in activities.


According to the report there are now 24 companies world-wide offering Pay As You Drive Insurance, with discounts of up to 60% over normal insurance.

Disappointingly I think only 13 micro-insurance programs. Micro-insurance is very important for poverty alleviation efforts. We all have great protection in developed countries should something go wrong. Not the same in poor countries. The report identified microinsurance
products covering 7 million policyholders. The purpose of these products are to respond to food and water shortages in rural areas of South America, Africa, and Asia.

Also interesting that the report says only 9 companies offering carbon offsets to their customers. Real Insurance's Pay As You Drive has a carbon offset option.


Also interesting the report says European insurers are much more advanced than their American counterparts. The exception in the US is AIG of all companies! AIG is progressive on the Climate Change front. So they may have broken the financial system, but at least they're saving the planet...

Another very interesting initiative is from Progressive. They've offered a $10m prize for efficient motor vehicle design. It is a pity that the auto industry is under so much pressure though.

The report does contain some numbers on Pay As You Drive successes, but it is unfortunately still sketchy. Nevertheless, the table is below:

The original Ceres report can be found here.

A New York Times write-up of the report can be found here.