Paul Carroll
In the U.S., a backlash against telematics may be taking shape, along the lines of, “Your car is spying on you.” How big a problem do you think that will be?
Matteo Carbone
Let's separate perception from reality. If we look at the perception in the insurance community, in the OEM community [the big car makers, known as original equipment manufacturers], sure, this is perceived as a big issue. But if we look at the reality, I'm not convinced that the issue is so big.
First, after the problem with General Motors was highlighted in the New York Times, GM said it discontinued providing data on drivers to data brokers. And Verisk shared in their earnings call that this service only accounted for $1 million in revenue, so we’re talking about nothing.
In my research, the number of policyholders who share driving data through an opt-in program is about 19 million. How many of them did it through OEMs? Less than a million. Almost everyone is sharing data through an insurer’s own mobile-based app after opting in to its UBI [usage-based insurance] program. There is no comparison. One is an elephant. The other is a small insect.
Second, I don’t think drivers are all that concerned. They only get concerned about privacy when the value proposition is not interesting enough. When you do customer surveys and ask someone, “Are you concerned if a company sells data about you?”, they say, “Yes.” But if you ask, “Are you interested in communicating with a friend?” or “Would you like a discount, but to get it you have to consent to having data about you used?”, people are not concerned any more. They want the benefit. This is why so many people use social media and a growing number of policyholders are opting in to UBI programs when they switch carriers.
Obviously, there are different personas, but I'm talking about the large majority of people.
A lot of OEMs are becoming more prudent. In the last few months, I’ve heard less talk about how they want to be a data provider. But in the future many data sources will be available.
Paul Carroll
Tell me more about what that future will look like.
Matteo Carbone
Progressive has demonstrated that the data works super well for pricing sophistication. if you look at the delta between the loss ratio for Progressive and the loss ratio for the rest of the market, it was five percentage points 10 years ago, was between 10 and 15 points for the following seven years and has been consistently above 20 points over the past two years. Over these years, they have increased the relevance of UBI in their portfolio and raised the sophistication of the telematics tariff.
But we can be seen as too inquisitive and as the bad cop. You remember when the Wall Street Journal did an article five or six months ago about homeowners insurance companies using aerial data about rooftops. We’re chasing the policyholder and saying, “I may penalize you.”
It is legal. Insurance commissioners allow this behavior. Insurance companies are one of the few categories of companies that can use consumers’ credit scores. This allows carriers to use data as a way to provide more affordable insurance to many.
But I foresee a future where insurers will go beyond the inquisitive bad cop and be more friendly. Any carrier can obtain pricing sophistication by offering an insurance proposition such as, “You provide me verified information that you are better than the average policyholder, and you will receive great benefits.”
Paul Carroll
I know you have an example of a program that you think really gets the approach to customers right.
Matteo Carbone
If you look at the first article in the New York Times, there were many comments from readers. Some said that GM’s tracking of driving behavior was just the first step and that, before long, my health insurer will be looking at what I purchase at the grocery store.
The funny thing is that in the Vitality program in many markets, one of the verified types of information you can provide is from swiping your loyalty card at the grocery store. You receive benefits if you show that a large part of your basket consists of healthy products.
In Vitality programs around the world, people buy the health or life insurance product, then pay a fee to enroll in the reward program. Then you need to show verified information to obtain benefits.
Vitality launched more than 25 years ago in South Africa and today is in use in more than 40 markets, from Japan to continental Europe. In the U.S., John Hancock is their partner. In South America, it’s Prudential.
The Vitality approach is the right one: “If you want to share verified information with me, I may be able to offer you benefits.” This makes policyholders crave to share the data.
But there needs to be a big change in the marketing of UBI. Let's be honest, the storytelling for UBI products hasn’t changed a bit in 15 years.
Paul Carroll
Beyond the shift in storytelling, what else needs to change?
Matteo Carbone
Telematics and UBI have been used in the U.S. as a booster for new business for the past 20 years. But only between 10% and 15% of auto policyholders change insurance each year, and frequently it’s the same customers who move around. So, by design, you are focusing on a fraction of the market.
If you look at the total number of policies that share data with an insurer compared with the total number of policyholders in the U.S., we are talking about less than 8%. That’s not bad. But if you look at how many new customers choose UBI when buying insurance through the direct channel for the top 10 providers of personal auto insurance, the figure is more than 40%, for some up to 70%.
But the direct channel is not the main one for many insurers. They use agents, and the way UBI is currently designed doesn’t offer them any benefits. Insurers are telling agents, “We have a great program for you that can offer your clients a 30%, 40%, 50% discount if they drive well,” but that means a 30%, 40%, 50% drop in the commission to the agent.
If you expose the customer to the offer, they like it, but why would agents promote the UBI offer?
Insurers need to provide an incentive to agents.
Insurers also need to think about the vast majority of clients who don’t switch every year. Why limit UBI to new customers? Why not offer it to everyone? Without touching the pricing, only to provide a better claim experience and behavior change programs?
Paul Carroll
Terrifically insight, as always. Thanks, Matteo.
