Coverbox - A Pay As You Drive Aggregator!

One of the interesting things about the UK insurance market is the success of aggregators. An aggregator is an intermediary that sells you insurance from a number of different companies either over the phone or the web. It is not quite a broker in a traditional sense, but similar.

Aggregators have been highly successful. And an aggregator has a compelling consumer proposition, as the consumer can get a number of prices from one place. So for one investment of say 10-15 minutes, the consumer can get a number of different quotes, instead of calling around to many different companies to get the same result. But more on aggregators and specifically aggregators in Australia at another time.

In the UK Coverbox now provides Pay As You Drive insurance on an aggregator basis. The product is a telemetry-based product: They fit a black box to your car, and then charge you retrospectively for when and how far you drove your car. The black box is also a theft recovery device, and they claim 98% recovery within 24 hours. It would be interesting to know how much of that 98% is joy riding and would have been recovered anyway.

The product therefore at first glance seems similar to the Norwich Union product (which the press release says was very "popular"...).

The branding is good. The name "Coverbox" is highly descriptive of what they do. They currently have 4 insurers on their panel (The Co-Operative, Allianz, Equity Red Star and Groupama). They say they will add 2 more.

I hope they do better than Norwich Union. The concept of an aggregator Pay As You Drive certainly has consumer appeal.

The description of what they do (from the coverbox.co.uk website) reads as follows:

You could save money with Pay As You Drive (PAYD) comprehensive car insurance from coverbox. Coverbox treats the insurance cost like a utility bill. At certain times of the year you will drive more miles than forecast and at other times less, just like you use more water in the summer than in the winter. You can control your costs once we install a free coverbox device in your car, still paying for your insurance monthly or annually. Get a quote from our panel of leading insurers to see if you could save money. Coverbox also gives you theft tracking - 98% of cars stolen are retrieved within 24 hours.

The article from myfinances.co.uk is below:
Pay-as-you-drive' insurance policies are about to take UK motorists by storm, according to one provider.

Although the concept of using a 'black box' in-car tracker to measure mileage has been around for a while, take-up has been slow and pioneer Norwich Union 'paused' its policy last year due to the cost of providing the service.

More Than still offers a similar policy for young drivers, Drive Time, but until now consumers have had limited alternatives.

However, new technology with the added bonus of theft-tracking means several insurers are now offering policies through Coverbox, giving consumers more choice.

Customers logging onto the site receive a selection of quotes from insurance companies offering the service, including The Co-operative, Allianz Insurance, Equity Red Star and Groupama Insurances.

Coverbox said insurance will ultimately be offered by six big insurance brand names, with the remaining two insurers to be confirmed shortly.

Sandy Dunn, chairman of Wunelli, the company behind Coverbox, said: "We believe both the consumer and the motor industry are now truly ready for pay-as-you-drive insurance.

"Others have tried before with older generation technology but our solution is new-generation, highly-capable and based on integrated security solutions specified and proven by the leading car manufacturers in Europe and Japan."

Coverbox calculates the cost of insurance based on the driving habits of the customer, then fits a box to their car that will calculate the actual mileage.

The customer then receives monthly bills based on their usage.

"In summary, it will work very much like a monthly utility bill - the key difference, though, is that low risk drivers who use their cars little and in off-peak periods are not penalised by the actions or accidents suffered by higher risk drivers driving at higher risk times," Mr Dunn added.

"We believe a significant number of Coverbox customers will save a great deal of money compared to the cost of 'traditional' car insurance premiums."

James Harrison, chief executive of comparison website Insurancewide.com, said: "Coverbox could be a good deal for younger drivers with low mileage. This kind of scheme didn't work for Norwich Union because the take-up was lower than expected, possibly because drivers were wary of the Big Brother type tracking device.

"However, Coverbox's impressive claim that its own device will recover 98 per cent of stolen vehicles will attract great interest and it may be far more successful. It's also flexible in that there's no age restriction and you can specify likely peak and off-peak mileage.

"For older drivers with average mileage, there are no clear advantages through Coverbox and drivers should compare its offer very carefully with other providers by scouring the market online. Comparing like-with-like is the absolute key to getting good value, it's not just about the lowest price."

Norwich Union said it currently has no plans to bring back its own popular pay-as-you-drive policy.

The End of All-You-Can-Drive Insurance

A lot is being written, said and blogged about in terms of Pay-As-You-Drive insurance. Much of it is repetition of what has being said already, and Bordoff and Noel of the Brookings Institute have been well and truly quoted many times.

I came across a write-up by Rob Inglis in a blog called “The New Republic” which eloquently states the case again. What makes it worth mentioning though were: 
a) It has a catchy title for traditional car insurance: “All-You-Can-Drive” Insurance, and
b) It has a really good discussion going in the comments section.

There are a number of misconceptions that were only partially cleared-up in the discussion.

Rural people will be penalized:
Untrue. Pay-As-You-Drive (PAYD) will not use mileage to replace all other factors, but to make risk pricing more accurate by using mileage in addition to the current rating factors. So the fact that people live rurally is already factored into car insurance pricing. What PAYD does is differentiate between low mileage and high mileage drivers in the rural area.

Insurance companies would have done it already if it made sense:
Untrue. The Multiple Prisoner’s Dilemma is the major factor that keeps them from doing it. Read the post on 22 November. Other factors include systems and regulations.

Progressive patents keep insurance companies from doing it:
Untrue. The opinion of carriers in the US is that the patents do not pose a barrier to them doing PAYD. See the diagram of the poll conducted amongst 90+ carriers in a recent Webinar. The stated obstacles in the poll were 46% systems, 20% privacy concerns, 18% cost of telemetry, 14% state regulations, and only 4% patent infringements. See Exigen for details.

Hurting vulnerable people is lousy social policy:
Untrue, within context. Hurting vulnerable people is not good. But subsidizing one group of people (high mileage drivers) through charging another group more (low mileage drivers), while at the same time creating a nasty externality that is akin to charging a flat rate for petrol regardless of usage, is lousy social policy. I have sympathy for people who will pay more. But the problem should be viewed in full context.

Mileage does not relate to risk:
Untrue. Simplistically, if you’re not driving, you cannot make an accident. The curves are not linear, and the curves differ for different profiles of drivers. Data and experience will fine-tune exact pricing over time. But the basic premise is sound AND meaningful.

The cost of implementing outweighs the benefits:
Untrue. Two solutions exist already that do not rely on telemetry or ongoing inspections. One is Real Insurance and the other Milemeter. Even for telemetry based solutions the cost of the technology is rapidly decreasing, and the device types are cheap and easy to implement.

The full posting of the blog can be seen at The New Republic.

Leaping ahead in Netherlands, sliding backwards in Manchester

Pay As You Drive road pricing is closely related to PAYD insurance. Both are instruments that public policy makers can use to improve congestion, road usage and the costs associated with it. The concept of road pricing is charging road use on a usage base, and using the pricing to control or curb congestion. A good example of it is the inner London flat fee when you drive into London. A crude but effective way of making you think before you jump into your car and drive into London (like the traffic isn’t enough).

The problem with road pricing is that it is highly unpopular. I am always amazed that a change in toll fees for the cross-city tunnel in Sydney makes front-page news for a week (page 16 has children dying by the millions due to the Food Crisis). The voting public hates it when something they have for free suddenly has a price on it. And that is the problem. It is politically challenging for a politician to introduce sound policy in this space, particularly when people have to pay for it.

Two recent examples of success and failure are in the Netherlands and Manchester. In the Netherlands they announced a bold and spectacular program to get every car wired by 2016 and have accurate road pricing, linked to type of road, time of day and type of vehicle. PAYD insurance is so obvious once you’ve made that mind shift. Add to this the fact that the Netherlands has the highest use of bicycles in the world (having no hills has its advantages…), and you have a society where transport is going to be seriously responsible.

Contrast that with Manchester, where a public referendum said no in very certain terms to a road-pricing scheme), to the tune of 4 to 1. It is being heralded as the last rites to road-pricing (and slated as being a major step backwards for the Government (who established a multi billion dollar fund to support this) and for other cities with similar plans.
It will be interesting to understand the dynamics of how the Netherlands went about it, and what the factors were that made it successful, versus the Manchester stuff-up.

So what’s the solution to the Multiple Prisoners’ Dilemma?

Following the post on Multiple Prisoners’ Dilemma (see 22 November post), Justin Horner wrote to me and said I cannot just state a problem without stating the solution. Fair point. I don’t have the solution, but I can suggest some solutions:

1. From a Regulatory perspective the US is a fascinating place (in a morbid sort of way). It is legislated for example how you rate, meaning which rating factors you must use and what weights they must carry. So the easiest solution is: Mandate PAYD through regulation. Although it has been raised as a possibility in California, I think it is unlikely to happen though, and will definitely not happen here in Australia.
2. The Government and Regulators can do a few other things too. One of these is to waive taxes and duties on PAYD premiums. In Australia for example premiums are loaded with GST, Stamp Duty and in some states a Fire Services Levy. Waive these on PAYD policies and make them even more compelling for low mileage drivers. The tax revenue argument to justify this is that low mileage drivers are over paying for road usage anyway through normal taxation methods and car registration fees. Another argument is that it will shift people into PAYD quicker, meaning less driving (see 31 July 2008 post for the Brookings Institute paper on the impact of PAYD), resulting in lower cost of infrastructure for the Government, offsetting the lower tax collections on these policies. This will stimulate the market forces through increased consumer demand, which will in turn bypass the Prisoners’ Dilemma. There are a few other government interventions. The aim is to make the cost of car ownership as variable as possible. If car ownership becomes more variable, people will drive less, which will make PAYD insurance even more attractive. There are two sides to this, described in 3 and 4 below. 
3. Make the existing fixed existing cost variable. The prime examples of this in Australia are annual registration fees, which runs into a few hundred dollars, and compulsory third party (CTP) liability insurance, with currently regulated pricing. Clearly low mileage drivers are getting a raw deal on CTP. 
4. Toll the roads. If I drive down to the local supermarket (or almost anywhere in Sydney, as long as I avoid the bridge and some of the motor ways) it does not cost me anything. And yet I am using something that costs money to maintain. I should be paying for it on a usage basis, as opposed to a taxation basis where my usage has no bearing on what I pay in taxes. So if there is a direct correlation between my driving and the cost of using the road, I will no doubt be more responsible. I will drive less, which will in turn make PAYD insurance even more attractive. The second aspect of this is that technology is required to do accurate tolling. This is where PAYD and tolling at least in theory can meet. All PAYD products (other than Real Insurance and Milemeter) uses a form a telemetry. That can double for tolling. It won’t be politically popular, but it will work.
5. The Government can offer insurance companies incentives. These incentives can be targeted to ease the cost of system and product development, roll-out of telemetry for PAYD solutions requiring telemetry or even assist with promotion. The political endorsement and promotion does not cost any hard dollars, and can do a lot to stimulate the development of the product. A framework around this is suggested by Jason Bordoff and Pascal Noel of the Brookings Institute.
6. There are also things insurance companies can do to solve their Prisoner’s Dilemma. Looking from the outside at what Progressive has done, I suspect their angle of attack is to offer a voluntary product where people get adjustment on their future premiums based on their driving in the past. This is a reasonably “soft” way of introducing it into an existing portfolio, and time will tell how successful it will be.

What will be great is to see politicians and regulators getting engaged on the topic, and stimulating the development of PAYD. Everyone is watching Steve Poizner (Commissioner of Insurance in California), who is actively developing policy for California around Pay As You Drive. Many of the US states are watching and waiting to see what happens in California before they act. Hopefully Mr Poiznier will have the courage of his convictions to do something incisive and robust. We wait with interest.

In Australia, where we have an up and running product working really well, there has been no government interest to date. We live in hope.

A Multiple Prisoner's Dilemma

The concept of PAYD, or usage based pricing for car insurance has been around since 1920. The following is an excerpt from an email sent to me by Patrick Butler, Insurance Project Director at the National Organization for Women:

"The audited odometer mile exposure unit has been available for commercial fleets since at least the 1920s, was discussed by 1996 Nobel laureate economist William Vickrey in a 1968 paper, was the subject of a sex-discrimination lawsuit brought in 1986 by Pennsylvania National Organization for Women and documented in three Journal of Insurance Regulation (JIR) papers in 1988 and 1989, was described as the basis for an efficient pre-paid-miles personal car odometer system in a 1993 CAS Forum paper to support exposure unit legislation introduced in Pennsylvania 1990-1993, and so on.

All of these items are documented by papers and reprints available on the website www.centspermilenow.org."

So why is it taking so long for insurers to adopt Pay As You Drive. Progressive in the US had a pilot called Autograph in 1998. That is 10 years ago! Either the concept is flawed, or there must be another reason. 

In terms of the concept being flawed: The concept of PAYD will be flawed if there is no meaningful relationship between how far a person drives, or how they drive, or where they drive, and the amount of risk they bring to the risk pool. The possibility of there being no meaningful relationship is counter-intuitive, but nevertheless possible. Published results of Progressive's Autograph pilot in Texas indicates a clear relationship between distance driven and risk. Furthermore, traditional insurance pricing does its best to capture driving behaviour, by looking at factors like age, gender, vehicle modifications, etc as proxies for risk. So it is unlikely that PAYD is not taking off due the concept being flawed. There must be some other reason. I believe there are two major reasons, and a number of smaller ones. This post deals with the first reason (Prisoner's Dilemma). The second big reason I believe is systems, and will be discussed in a future post.

Multiple Prisoner's Dilemma:

The concept of Prisoner's Dilemma is a classic game theory problem. The basic prisoner's dilemma is explained quite well in Wikipedia. What does that have to do with PAYD? 

To answer this we need to look at the basic premise of the product: In traditional insurance, people who drive less, pay the same as people who drive more (all normal rating factors assumed to be the same). The reason for this is that traditional rating factors (age, gender, suburb, car make and model, claims experience, etc.) are crude proxies for the true underlying risk. Insurance companies have not used mileage actively as a rating factor, because of the difficulty of verifying mileage (mileage as a rating factor is mandated by law in California, but is not checked by insurance companies and a consumer can frankly declare whatever they want). So PAYD introduces accurate pricing for mileage, and by doing so low mileage drivers can receive a more accurate and fair premium.

If you are an existing insurance company with a large book of existing car policies, you most likely have a finely balanced book that is profitable, albeit with thin margins. Your pricing is working, and the cross-subsidies between high mileage and low mileage drivers are balanced. If you introduce PAYD you will charge low mileage drivers less (and a fairer price) and high mileage drivers more. High mileage drivers will most likely leave you and take insurance from someone else who still provides traditional insurance. As an insurance company you face the prospect of losing a large part of your book before you can replace it with low mileage drivers (where you are in fact competitive). That is a daunting prospect. You have a large infrastructure in place which you've built up painstakingly and which is well matched to your current size and volume. If you lose material volume your expense ratios will blow out, which will in turn very quickly eat through your thin margins, leaving you unprofitable. That is not an appetising scenario for any insurance executive.

So this is where the multiple prisoner's dilemma comes in. If nobody acts (i.e. nobody offers PAYD), then status quo remains, books remain finely balanced and life goes on. The first large player to offer it faces the uncertainties listed above, and may take some short term strain. After the short term strain however, the first mover(s) will start benefiting from attracting more and more low mileage drivers and having a competitive offer for arguably 50% of the market. 

What does that do to the other companies? As their low mileage drivers start abandoning them, their book becomes unbalanced. They have less low mileage drivers to cross-subsidise their high mileage drivers. Over time their margins will erode, and arguably in time they will be forced to switch to PAYD.

The Prisoner's Dilemma is not a trivial problem for existing insurers to overcome, and I think it will take many years for them to do so.

PAYD Webinar archive

On the 5^th of November the National Underwriter hosted a webinar on Pay As You Drive, titled:

PAY ONLY AS YOU DRIVE INSURANCE COMING READY OR NOT

What Are the Business, Technology and Regulatory Realities You Need to Know?

It was attended by 280 people, mostly based in the US. Most of the major carriers were represented, as well as state regulators and consumer groups. The archive of the actual webinar can be found on http://www.summitwebseminars.com/exigen/Pages/default.aspx.

 

Some coverage for Pay As You Drive in The Australian

The article below appeared in the Australian today.

Source: http://www.theaustralian.news.com.au/business/story/0,28124,24546649-5001942,00.html

A car insurance product

What's new | October 29, 2008

What is it? A car insurance product which the promoters say could significantly reduce a person's premiums.

Pay As You Drive from Real Insurance allows qualified motorists to pay only for the kilometres they plan to travel.

What are its features? Pay As You Drive allows motorists to cover their vehicles based on how far they drive. Motorists can buy kilometres and are covered until they complete that distance. Anyone driving less than the average for people with the same insurance profile should pay less than they would for traditional comprehensive car insurance. Those who qualify get comprehensive car insurance with a minimum annual premium and purchase insurance for the kilometres they expect to cover in that vehicle. Unused kilometres never expire -- they can be transferred year to year or be refunded and customers who are about to run out of kilometres can apply to purchase additional kilometres. Pay As You Drive reminds customers when they may need to top up their kilometre balance with a sticker for their windscreens and SMS messages to their phones. People who have not made a claim against any of their Pay As You Drive policies for three years in a row receive 10 per cent of the total premiums paid in that time. Similar insurance products overseas require policy holders to have their vehicles equipped with monitoring devices. Pay As You Drive in Australia relies on the customer reporting the odometer reading of the vehicle insured.

What are the advantages? Pay As You Drive is suited to people who drive to and from the train station or work close to home and perhaps use their cars on weekends. It also suits those who have a second or third car.

What are its disadvantages? Pay As You Drive is not for everyone. It works for people who drive less than average. Motorists who drive a lot are actually being subsidised by traditional car insurance, so Pay As You Drive won't work for them. Pay As You Drive is available only to drivers over the age of 25.

What does it cost? Pay As You Drive claims cost savings of "up to 60 per cent on car insurance per annum". A 29-year-old Parramatta man who owns a Mitsubishi hatchback would typically pay $981 a year for insurance, but if he only drives 5000 kilometres, he would pay $316 per year with Pay As You Drive.

For more details, visit  www.payasyoudrive.com.au