The Rise of Usage-Based Insurance
In the 15th century, when flat-earthers were the vast majority, it took an act of faith to sail over the horizon. John Harrison devoted his life to designing and building a reliable marine chronometer, finally producing the H4 in 1761. Together with the sextant, invented in 1759 by John Bird, the marine chronometer revolutionised navigation, and these instruments might be considered the forefathers of telematics.
February 22nd, 2022
Fast forward to 1977 when Frenchmen Simon Nora, a civil servant, and Alain Minc, a businessman, were commissioned by the President, Valery Giscard d’Estaing, to produce a report on the computerisation of society. In their report Nora and Minc coined the new portmanteau word “telematiques” from “telecommunications” and “informatiques”, anglicised to telematics. The report wasn’t even insurance-related.
The earliest patent for what we now recognise as telematics was granted in 1996 to Minguijon Perez Salvador. Shortly after this, US insurer Progressive launched a telematics policy. Several other US insurers followed suit, but it wasn’t until early 2005 that Norwich Union (NU, now Aviva) announced that it was introducing a “pay as you drive” policy in the UK. NU even bought the European patent rights to Salvador’s design, to protect their right to develop the idea.
Since the 1970s, car ownership has boomed in the UK. According to the RAC Foundation, in 1971 there were 19 million cars. By 2007 there were over 31 million. Young and inexperienced drivers as a sector had a notorious and unenviable claims experience, which was reflected in high premiums, especially for young men. The NU black box policy was targeted at the sector, with attractive discounts dangled as an incentive for better driving habits.
When the news broke in early 2005 about the new NU black box policy, there were some choice comments on the forum at pistonheads.com. Among those shareable on this family-friendly blog were “Personally I think it’s the beginning of the end” and “To be resisted at all costs. That’s a way of penalising you for being a petrolhead …”.
However, money talks, according to Euripides, Neil Diamond and rapper Fredo. This appears to be borne out by research by accountants Deloitte, who found that usage-based insurance has the biggest uptake when the discount offered is over 20%.
In the early days of the NU black box policy, savings of one third were said to be achievable. There was obviously enough take-up, as the policy remained available, but the initial black box provided no direct feedback to the policyholder. If the data revealed unsatisfactory features the insured might hear from NU, and presumably the expected savings didn’t materialise. Otherwise it was a one-way system.
Improvements in mobile phone technology meant that smartphones could be the transmitting part of the black box. This opened up the ability to share the data with the policyholder via an app on the smartphone. The data can usually be viewed in various ways, either in near real-time or as driving reports.
For insurers, this development meant a reduction in hardware costs, as the phone is already the property of the insured. For policyholders, it offered another very practical use of their smartphone.
As users became used to phone-based apps and the concept of exchanging personal data for value-added services, usage-based car insurance saw increased acceptance.
In the meantime, usage-based insurance aimed at commercial and fleet owners gradually shifted perceptions from the rather negative image of a black box reporting bad habits to insurers, to a more positive tool enabling the policyholder to engage with the process and achieve cost reductions.
The examples of usage-based insurance examined so far have used telematics to determine the premium or rate for the usage. To bring us full circle back to the mariners that started our voyage, in early 2018 a consortium involving EY (Ernst & Young), Guardtime, Microsoft, Maërsk, Willis Towers Watson and others launched Insurwav, a marine cover based on telematics and blockchain distributed ledger technology. Typical marine voyages involve transits through multiple jurisdictions with different regulatory and compliance requirements together with manifest changes as cargo is delivered or taken on board. Smart contracts can trigger, for example, additional cover when a vessel enters a war zone or piracy risk area, and turn off the cover when it clears the zone. Human intervention is minimised, reducing handling costs. The risk of gaps in cover is reduced. The blockchain ensures that all interested parties have access to the same timely data 24/7/365.
It’s easy to see how this model could be applied to road haulage and supply chains, which face many similar challenges to marine transport. There is perhaps potential for freight and contract data being used to automatically create the customs and compliance documentation that is such a blight on exporters and hauliers, post-Brexit. Surely an insurance product that could save hours or even days would be an attractive proposition?
It’s harder to see how blockchain technology could impact car policies, which are generally much simpler than commercial or fleet motor policies. However, as technology advances and more data becomes available from more IoT (internet of things) sources, perhaps the future of private car usage-based cover lies in embedded insurance. As autonomous vehicles are already a reality, is it such a huge step to include insurance, which would, almost by definition, be usage based?
In April 2021 the UK government announced plans to allow vehicles with automatic lane keeping systems (ALKS) to be used hands-free at up to 37 mph. ALKS usually includes the ability to control speed and distance from surrounding road users. The consultation to update The Highway Code also included proposals for rule changes to “ensure the first wave of this technology is used safely and responsibly”.
The revised Highway Code took effect on 29th January 2022, but without the ALKS changes, and ALKS vehicles have not yet been granted type approval for UK use. However, a betting man wouldn’t give odds against legal hands-free use of ALKS vehicles, possibly even this year.
A report by industry analysts Global Insights predicts that by 2024 sales of commercial vehicle telematics policies will reach a compound annual growth rate (CAGR) of 18%.
The future of usage-based insurance seems assured. From a starting point as a means of reducing premiums for substandard risks, we are approaching a situation where usage-based will be the only sensible way to rate most motor risks. It would be foolish to ignore the data made available by technological innovation.
From the blue Trafficmaster cameras of the early 2000s, there is now a bewildering array of road and traffic infrastructure capable of interacting with smart vehicles or smart devices. The same technologies that have enabled and driven the rise of usage-based insurance will also operate to improve road safety and reduce the number of road accidents.
But as long as there are pedestrians, bikes & horses, there will be insurance claims and the need for easy-to-arrange, affordable cover.