Insurance and innovation

An article recently compared a BusinessWeek innovation list with innovation in insurance (see the article below). The writer, Chad Mitchell, makes the case that there are innovation in motor insurance in particular, it is just not noticed, and that more innovation will follow.

I agree with Chad. It is frustrating that insurance innovation is not noticed. It is even more frustrating in Australia than it is in the US. In fact, at Real we have two the three innovations Chad mentions in his article. We launched the world’s first trust-based Pay As You Drive car insurance, and Australia’s first Pay As You Drive car insurance. Our products have highly customisable cover, and you can optimise your premium to what suits you (within a framework of course).

If there are any notable innovations in the insurance space, particularly the personal lines insurance space, please comment on this posting, and let us know what you think!

Insurance and Innovation: An Oxymoron?

By Chad Mitchell July 8, 2009

Awhile back I wrote about the evolution of social media strategy for insurers. The premise of the blog was how insurers effectively use social media to improve customer service and help agents.

The topic of social media is a microcosm of a bigger question I commonly receive from insurance executives: Can insurers and other financial services firms innovate?

Innovation within insurance is stifled because of the extremely challenging regulatory environment. Individual state legislation, product restrictions and widely varying consumer regulations often deter insurers from investing in new products, pricing, promotions and services.

There is proof, for the naysayers, that innovation remains a myth for insurers and financial services providers. Business Week annually ranks the Top 50 Most Innovative companies around the world. Not a single insurer or financial services firm appears in the ranking (except for Citigroup). I don’t believe the report card tells the entire story though. Yes, insurers may never offer the next iPhone or Dyson vacuum, but the track record for innovation is growing.

Just look at a few examples of innovation from insurers over the past few years:

• Telematics and pay-as-you-drive insurance. Progressive leads the pack offering an array of innovative products and services. The firm uses telematics to offer customers a novel concept— a car insurance policy based on how well and how much you drive. Progressive’s MyRate pay-as-you-drive product is a behavior-based car insurance policy that lets drivers lower their premiums based on how they drive. Drivers receive a small wireless device that plugs into a port in their car and measures how, how much and when the car is being driven. Cars driven less often, in less risky ways and at less risky times of day can receive a lower premium.

• Price comparisons and “name your price” solutions. Priceline.com built the business model for name-your-price travel. And Progressive seized the opportunity to innovate within insurance. Progressive currently promotes its Name Your Price service that allows customers to set a budget for auto insurance. Then Progressive builds an auto policy to fit the customer’s needs and wallet. Progressive and Esurance also innovate by offering customers competitive price comparisons at their Web sites. A customer can see a Progressive or Esurance quote along with two to four competitors’ prices. This creates transparency for customers who are seeking the best coverage and lowest possible price.

• Mobile applications and the iPhone. Apple topped Business Weeks’ list as the most innovative company in the world. The company continues to dominate the MP3 market with the iPod, and is making waves in the mobile category with the iPhone. The iPhone is only used buy a small portion of mobile U.S. customers (around 5%), but the penetration of smart phones continues to grow exponentially. Nationwide jumped on this growing segment, and was the first U.S. auto insurer to develop a claims application for a smart phone. The firm released its new iPhone application, available to Nationwide and non-Nationwide customers, that lets policyholders file a claim, take pictures of accidents and manage the claim process through an iPhone application.

These examples may not grab headlines or put any insurers in Business Week’s most innovative ranking, but I believe innovation is happening right now. I speak every week with leading insurers who are evaluating amazing new innovations.

Most innovations are related to integrated online experiences that give customers the opportunity to build a personal risk and financial inventory. Customers will soon have online, mobile and social applications with rich tools, calculators, real-time pricing and online advice software to help them optimize their insurance and investment portfolios.

These integrated experiences will incorporate budgeting, banking and payment solutions normally found through traditional retail banks or investment brokerages.

Human resources and hiring trends are also improving the odds for innovation within insurance. Insurers are hiring senior IT, eBusiness, marketing and product executives from outside the industry. This hiring trend brings new talent to traditionally conservative insurers and executives with proven innovation performance.

We will continue to see major strides in innovation in the next year as insurers deliver more customized products and services to policyholders. Innovation and insurance is no longer an oxymoron.

Original article here.

Some more Australian Press Coverage

Since we launched Real Insurance Pay As You Drive® in Australia, we have had more good press in the US than in Australia. We are apparently known as “that Australian company”, and (somewhat insultingly…) I have been asked many times why our innovation happened in Australia first (as opposed to in the US). We believe we’re a world first. So we are quite glad when we get some attention in Australia.

Jordan Chong wrote an article for AAP recently, which was published (without any vetting from us beforehand) quite far and wide in our terms. The article is included in the post below. Or you can view an example of the article online on this link.

Mr. Chong helped to generate some more publicity around PAYD – and that is a good thing. However, we did not see the article before it was published. This means there are some comments in the article that are not exactly right, so for good measure, you should note that:

1. None of the comments in the article were actually made by or for the Institute of Actuaries of Australia (Institute). Instead, the comments were made by Colin Priest in the context of an earlier presentation he made to the Institute. .

2. You can buy any number of kilometers on Real’s PAYD. The minimum is 5,000kms (as opposed to being sold in 5,000km blocks).

3. Real does verify the odometer of the vehicle in case of an accident, or when unused kilometers are to be refunded. It does not verify the odometer when the policyholder takes out the cover.

A related press release is also on this site, at this link.

Jordan Chong’s article:

Change to car insurance nets big savings

July 3, 2009

Basing the cost of car insurance on how far you drive can save people money and help the environment, a study says.

An analysis by the Institute of Actuaries of Australia found there was a potential saving of $3.2 billion per year if the cost of maintaining a vehicle was more closely linked to the number of kilometres driven.

One way of doing this was through pay-as-you-drive (PAYD) insurance, where the cost of the policy was based not only on the usual factors - driver age, gender, location and vehicle type - but also on how much the car was used.

The only provider of PAYD car insurance in Australia is Real Insurance, which has been in the market for about 12 months and sells insurance in 5000-kilometre blocks.

Real Insurance chief executive Roger Grobler said more than half of policy holders purchased the minimum 5000-kilometre option.

"If you're not using your car, you can't be involved in an accident," Mr Grobler said on Friday.

"The more you drive, the more the probabilities are of you being involved in an accident and the more your insurance should cost.

"Traditional insurance just doesn't work that way."

The Institute of Actuaries of Australia said the $3.2 billion annual saving - which equated to about $304 per vehicle - did not only flow to motorists in the form of lower insurance costs.

Cities and governments also benefited as fewer cars on the road meant fewer accidents, less congestion and reduced demand for road maintenance, as well as cleaner air through less pollution.

The findings were presented at the institute's biennial convention in April this year.

"Australians drive too much because much of the costs of driving are not paid directly by the driver or owner," the institute's Colin Priest said in a presentation at the convention.

"We estimate Australians will drive seven per cent fewer kilometres if Australia switched to PAYD."

Mr Grobler said a very small reduction in the extent to which people used their cars would have a "massive impact both for individuals and for society".

A financial analyst at Canstar Cannex, Joshua Zenas, said those with PAYD insurance had to keep track of how many kilometres they were logging.

"You need to be exactly aware of where you stand and how many kilometres you are left with," Mr Zenas said from Brisbane on Friday.

"That extra burden is there on a driver."

Mr Zenas said those who were not heavy drivers could potentially benefit financially from the PAYD method.

"There is a substantial level of savings based on the type of driving you do," Mr Zenas said.

Some PAYD providers overseas used annual odometer checks or installed a device in cars to keep track of driving distance, but Mr Grobler said Real Insurance did none of these things.

"It's based on a trust principle, there's no monitoring," Mr Grobler said.

Mr Grobler said PAYD insurance was available in the US, Canada, Japan, South Africa, India and parts of Europe.

The average motorist drives about 14,600 kilometres annually, according to figures from the Australian Bureau of Statistics.

Write-up on the PAYD talk at Accord Loma Conference

The talk on PAYD I did was written up in the National Underwriter. Quite scary how a Powerpoint presentation (actually Keynote, it is just a lot cooler...) is written up like this... Speed of information is incredible.

Original on this link.

Insurers Looking Beyond Pay-As-You-Drive Face Risks, Says Expert
ORLANDO, FLA.—Insurers may face new transparency obligations and regulatory challenges as they explore pay-how-you-drive and pay-where-you-drive insurance coverage, an insurance executive advised here.

Those new conundrums, where insurers gain knowledge of dangerous driving activity, were voiced by Roger Grobler, CEO of Australia-based Real Insurance, speaking at the ACORD-LOMA Insurance Systems Forum.

Already, insurers offering pay-as-you-drive auto insurance with rates based on how many miles a vehicle is driven have sparked some concerns about privacy where monitoring devices inside cars are used to track this information.

Mr. Grobler, whose company has a pay-as-you-drive program, said this problem can be avoided because insurers can also collect mileage information through periodic odometer inspections and other methods to avoid these privacy worries.

Mr. Grobler said Real Insurance uses a trust-based system for tracking mileage. Customers purchase coverage based on how many miles (kilometers in Australia) they plan to drive for the coverage period.

If the driver has an accident during the coverage period, and the odometer reading is above the purchased amount of miles, the claim is not covered, Mr. Grobler noted.

While buyers could conceivably roll the dice under this scenario, Mr. Grobler said most consumers want to know they’ll have coverage in the event of an accident.

Mr. Grobler said while pay-as-you-drive determines how many miles a person is driving, it does not identify if a person is driving poorly. For this reason, Mr. Grobler said Real Insurance is looking into a pay-how-you-drive program.

Under this program, a telematic monitoring device (not a GPS system) would reveal how the car is driven as well as miles. It would capture information such as speed, the rate of acceleration and deceleration, and time of day a vehicle is driven.

Mr. Grobler cited Progressive as a U.S. insurer using a pay-how-you-drive system.

The concept, he added, could promote safe driving as customers who know, for example, that the system is capturing whether they are driving during higher-risk hours between 11 p.m. and 5 a.m. may decline to do so.

A system such as pay-how-you-drive could also change the way insurers view rating factors. Mr. Grobler said with the type of data captured, insurers can see if an 18-year-old is driving more like an experienced driver, and if so, that 18-year-old can be rated similar to an experienced driver. Conversely, if a driving veteran is operating like a reckless 18-year-old, rates can reflect that as well.

Pay-how-you-drive, and the information it captures, is also less of a privacy concern than another concept: pay-where-you-drive, Mr. Grobler said.

Under pay-where-you-drive, a GPS system captures all driving information, including where an insured is at a given time. This system, Mr. Grobler said, is “quite invasive when it comes to privacy.”

He said it can raise questions as to a carrier's possible legal obligations and exposures when, for example, its data reveals that a policyholder is speeding though a school zone every day. He asked: Is the insurer obligated to inform law enforcement, and can the insurer be held liable if the insured strikes a child one day in that school zone?

How these pay-as/how/where-you-drive programs are treated by regulators and adopted by insurers remains to be seen. Progressive’s MyRate program, for example, is currently available in only 10 states.

Insurers may be reluctant to adopt such a program because their systems may be based on the current methods of evaluating risk, Mr. Grobler noted. Starting a new pay-as-you-drive program may require a lot of changes.

Milemeter's Chris Gay speaks at Ceres Conference

The following article appeared on EarthTimes following a Ceres conference on PAYD, where Todd Litman and Chris Gay spoke. It is good to see trust-based PAYD get some air time!

Original article on this link.

MileMeter Founder Featured as Expert on By-the-Mile Auto Insurance
DALLAS - (Business Wire) A select group of auto insurance regulators, environmentalists, consumer advocates and auto insurance executives recently gathered at the 2009 Ceres Conference to hear three industry experts outline the benefits of pay-as-you-drive (PAYD) insurance.
“Pure mileage-based insurance is a unique product that is equitable, environmental and responsible,” said MileMeter President Chris Gay, during his presentation.

Gay, founder of Dallas-based MileMeter, was invited to weigh in on by-the-mile insurance because MileMeter continues to be the first and only company in the nation offering by-the-mile insurance without installing tracking devices that raise the cost of insurance, violating consumer privacy.

"MileMeter offers the best Pay-As-You-Drive policies currently available in North America. It’s easy to use, affordable and gives motorists the maximum possible incentive to reduce their annual mileage," said one of the panelists, Todd Litman, founder and executive director of the Victoria Transport Policy Institute.

“MileMeter is setting the standard for the entire industry by directly servicing overcharged and underserved drivers,” Gay noted. “If MileMeter does its job well, other insurance companies will soon follow our lead so that Texas drivers aren’t the only ones benefiting.”

Working to address challenges such as global climate change, Ceres acknowledges that PAYD insurance is one way to provide consumers with an economic, green incentive to limit miles driven and receive a reduced rate in current policies while simultaneously helping the environment. Consumers respond to incentives, and with appropriate incentives Ceres argued governments and corporations can encourage more sustainable, responsible consumption.

During the presentation, Gay also outlined how MileMeter’s transparent pricing creates the most effective auto insurance incentives to reduce vehicle miles traveled (VMT). MileMeter’s radically different business model allows motorists to greatly reduce insurance premiums simply by driving fewer miles. For those driving up to 10,000 miles per year, expected savings can average 25 – 75 percent on most policies.

Gay explained, “MileMeter’s by-the-mile auto insurance is convenient, customizable and rewards good social and environmental behavior. The obvious consumer benefit is cost savings but PAYD auto insurance also spurs fewer miles driven on the roads, leading to fewer tailpipe emissions and traffic injuries, less toxic road runoff, and less demand for road and parking lot construction, which helps reduce urban sprawl, improve air quality and fight climate change.”

CNN Article on Pay As You Drive

An interesting article appeared on the CNN site last Friday (22 May) by Bengt Halvorson.

It deals with a number of the issues facing telemetry based Pay As You Drive.

1. Observing behaviour changes behaviour. This is a great benefit for a box in the car that observes how people drive.
2. Privacy is a major concern, especially with a box that tracks where you drive.
3. The article is critical about Progressive's MyRate's lack of differentiating between cars that behave differently. I'm not sure that is fair. If a driver accelerates or decelerates faster or slower, it has an impact on the risk of having an accident.
4. The article says Allstate, Unigard and Hartford are testing usage based policies!

The article is reproduced below. The original is on this link.

Car insurance savings come with 'Big Brother'
(AOL Autos) -- Tim Goodwin doesn't spend much time behind the wheel of his 2004 Chevy Tahoe. Even though he only covers about 3,000 miles per year -- using it just for weekend trips -- he had, until recently, been getting no special deal on his insurance for driving so little.

Six months ago, the Springfield, Missouri, property supervisor found a policy that gives him a break. So far he's saved about $48 -- or ten percent -- over six months compared to a traditional premium.

There's a catch; his insurance company, Progressive, is monitoring every move he makes behind the wheel.

Goodwin is fine with it, and says that just knowing that a small transceiver is reporting his driving behavior back to the insurance company helps him drive more carefully.

"There's this 'Big Brothe'r thing, but it's good," Goodwin said. "Since I know I'm being watched, I'm on my best behavior." AOL Autos: Check out other Big Brother devices

Goodwin noted that he's now less likely to speed.

"You'll, in effect trade a degree of privacy for a lower rate" in such a pay-as-you-drive policy, explains Mike Barry, vice president of media relations for the Insurance Information Institute. "They know not only how many miles you drive but how and when you drive."

For now, MyRate is the only widely available pay-as-you-go auto policy -- available now in nine states (Alabama, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Missouri, New Jersey, and Oregon), with at least three more expected by the end of the summer.

There are "tens of thousands" of drivers already enrolled, according to Progressive, and one in four existing customers of the company who've become eligible for the program have opted in.

Progressive says that MyRate may save up to 25 percent versus a traditional premium if you travel less than 10,000 miles per year, are a defensive driver, and rarely drive past midnight.

What bad behaviors does the system look for? Sudden starts and stops, and driving during higher-risk times, will raise the rate -- by up to 9 percent in states where a surcharge is permitted.

Progressive says that if you drive even once a week between midnight and 4 a.m. the policy probably isn't a good choice. On the flip side, smooth rural drivers who cover more than 15,000 miles a year could also save 20 percent or more. AOL Autos: Can your car last 1 million miles?

Several other insurers, including Allstate, Unigard, and The Hartford, are testing usage-based policies; and GMAC Insurance now offers a low-mileage discount of up to 54 percent to drivers of late-model GM vehicles -- with mileage reported by the onboard OnStar communication and safety system.

Another company, MileMeter, offers a system (only in Texas) through which customers pre-pay for a certain number of miles of coverage, as verified simply through the vehicle's odometer reading. AOL Autos: How to cut your insurance in half

In various forms, pay-as-you-drive policies are already offered in Canada, the U.K., Japan, Israel, the Netherlands, and South Africa, but for now the wider adoption of such policies in the U.S. has been slowed by the differences between in requirements in each state.

Why so long coming?

Tully Lehman, a spokesman for the insurance industry in California, a state that has recently laid the framework for pay-as-you-drive policies, says that the biggest concern with surveillance-based systems like Progressive's is privacy.

But there are also worries with the misinterpretation of the driving-style data.

"For instance, when the company sees hard braking," it could be driver inattention or carelessness, Lehman said. "Or, it could be a dog in the road." It also could be any number of things that have nothing to do with the driver's behavior.

Another issue is that the very vehicle you drive might not qualify you for much of a discount if it has touchy brakes or spirited acceleration; the company doesn't correct for the fact that some cars are more "responsive" than others. A Buick driver, for instance, might get more of a discount than a Mini Cooper driver simply because of the way the vehicles respond. MyRate doesn't differentiate between drivers, either.

MyRate users are able to log in and see an assessment of their driving style, along with charts and graphs and a running trip record.

While privacy advocates might already be up in arms over the data set -- which won't be shared with third parties but could be kept for up to six years -- they'll be somewhat relieved to hear that MyRate doesn't have GPS capabilities. The system knows "when" and "how" you drive, but not "where." For that, we'll leave the controversy to the GPS locators in cell phones.

Tracking exactly where users go would create serious privacy concerns, admits Steve McKay, product manager for MyRate

"Knowing location wouldn't add a lot to the predictive value either," McKay said.

The state of California in 2006 outlawed the pricing of policies by zip code, along with several other factors.

Although the future of pay-as-you-drive plans might rest in GPS-based systems that do track where you go, it's now looking like a distant future. California has also recently adopted new regulations that set the framework for pay-as-you-go policies, but the state's insurance commissioner, Steven Poizner, is especially conscious of the privacy concerns that the technology brings.

"I will not approve any auto insurance policy that aims to utilize GPS devices in order to obtain location data from consumers," Poizner said in a release last year.

State and federal governments also have their eye on GPS systems as a new way of figuring road tax in the future. With the projected long-term market swing away from conventional gasoline vehicles toward more efficient plug-in hybrids and electric vehicles, many state officials are worried about dwindling revenue for highways.

Currently, road taxes are collected via a per-gallon gasoline tax. Just earlier this year, U.S. Transportation Secretary Ray LaHood proposed a mileage-based method for calculating road tax, and several states, including Oregon, have tested a GPS-based system that would assess road tax.

Nudges drivers to be safer and greener

Drivers might simply choose pay-as-you-drive policies to get a break on their premium. But it'll likely save them even more in the long run; because they'll probably drive their cars gentler, get better gas mileage, put less wear on their vehicles, and be less prone to getting tickets.

"Just leaving the device in your car changes your behavior," Allstate spokesman Raleigh Floyd said. Because the company is scoring the driver's actions and there are measurable rewards for good behavior. "It becomes more game-like--and the benefit is that you're a safer driver." AOL Autos: How to avoid a speeding ticket

Even Goodwin admits that he finds restraint in his Tahoe when he wouldn't have before.

"Now when I just want to floor it, I don't," he said.

They're likely to reduce their trips as well. According to a report from the Brookings Institution, if motorists paid for their auto insurance by the mile, driving would decline by about eight percent nationwide, significantly reducing carbon-dioxide emissions and gasoline consumption, and nearly two-thirds of drivers would pay less for auto insurance. AOL Autos: How to get 100 MPG

Major environmental groups and safety advocates are also on board; the ten-percent decline in driving anticipated by the Environmental Defense Fund would not only reduce air pollution and toxic runoff but also translate to saved lives, through a 17-percent reduction in crashes.

Even Progressive agrees that a pay-as-you-drive policy won't be right for everyone. Those who value their privacy or want to drive however they please can rest assured; there will still be traditional policies for the foreseeable future, experts say.

But if you're willing to take your insurer along for the ride, you might soon have a lot of money-saving options.

Accord Loma Conference May 2009

Exigen Insurance Solutions invited me to speak at the Accord Loma Conference in Orlando Florida. The slide pack is uploaded below. The full talk will be available on the Accord Loma conference site in about a week's time, including audio and the questions afterwards.

What was interesting in terms of the questions afterwards:

1. The focus is strongly on telemetry / device driven Pay As You Drive.
2. The concept of the Multiple Prisoner's Dilemma struck a chord with the audience. It is a real problem.
3. The design of our Real Insurance Pay As You Drive also received a lot of attention.

Changing the world, all at once!

Shai Agassi is the kind of guy that makes you think of the famous Margaret Meed quote: "Never doubt that a small group of thoughtful, committed people can change the world. Indeed, it is the only thing that ever has."

In a really mind-blowing TED talk he talks about his vision to change transport in one big swoop to electric cars. He compellingly talks about figures having to be either infinite, 100% or 0%. No half measures. He says that Kennedy did not say the US will take man 20% of the way to the moon and then have a 20% chance of bringing him back. It was an absolute undertaking.

Similarly, in terms of environmental measures: Stop talking about half measures. Start talking in absolutes. Decide to solve it 100%. Make it infinitely scalable. Have 0% of the emissions we have today.

In the talk he explains his thinking that for electric cars to work (using today's technology) you have to think about the solution outside of just the car. So don't solve the problem inside the car only. Make the environment adopt the car. That means charging stations wherever a car can be parked. It also means replacement batteries at something that resembles a mix between a gas station and a car wash.

From the talk he has Nissan-Renault's backing, as well as Israel and Denmark as countries to do it in. Inspiring stuff!

It is worthwhile to listen to, and made me think: What lies ahead for insurance? What impact does this wholesale change to private transport in a country do for the car insurance industry in that country? Worthwhile to ponder.

Shai Agassi has been named by Time Magazine as one of the world's most influential people.

His business is appropriately called "Better Place".

The TED talk is on this link: TED