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Changing Lanes: Has the Era of Usage-Based Auto Insurance Arrived?

Why the coronavirus pandemic has accelerated the demand for usage-based auto insurance—potentially transforming the market forever.
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Changing Lanes:

As offices, stores, schools and more closed their doors to lessen the spread of a disease that has killed more than 100,000 Americans, cars across the country sat unused on driveways and in garages. In fact, miles traveled on highways during March retracted to 1985 levels, according to the Federal Highway Administration.

When the economy slowed and tens of millions of Americans filed for unemployment, insurers offered respite to the struggle: auto premium rebates. Nearly every auto carrier in the U.S. insurance market provided some form of premium relief to its insureds. Most insureds received a $50 discount on their premium, while many family plans were handed a 10-15% discount.

Were these rebates an admission that the fewer miles an insured drives, the lower the premium should be? Does this mean that the era of one-size-fits-all personal auto insurance is over? And has the time finally arrived for usage-based auto insurance (UBI) to become mainstream?

Consumers are increasingly more willing to use UBI, according to a series of J.D. Power consumer surveys conducted in March, April and May. Among those who anticipate their driving miles will remain reduced, over half say they are more willing to try UBI. Even after the coronavirus pandemic dissipates, consumers largely expect their auto usage to remain reduced, with only 38% of respondents expecting driving behaviors to return to normal.

Changing Lanes: Has the Era of Usage-Based Auto Insurance Arrived?“There are two main reasons that people are looking at UBI discounts and programs," says Suzanne Brown (pictured right), principal of Suzanne Brown Agency in Houston. “One is the economic concern that's out there. And the second is the significantly reduced driving activity. Both of those go hand in hand and it's making UBI programs a lot more popular. Some people who weren't interested in these programs and discounts definitely are now."

No Claims? No Increase

Since 2013, auto insurance rates have been steadily increasing. For drivers, especially those with no history of claims, rate hikes are “the No. 1 source of price frustration," says Tom Super, head of property-casualty insurance, J.D Power, who notes that about only half of the consumers were aware of premium reductions offered to insureds during the pandemic. Also, “only 42% reported that it was enough to help ease financial pressure," he explains, which highlights a demand for better communication, a better consumer-carrier relationship and fairer rates to boost waning consumer satisfaction.

“Price sensitivity is only growing," agrees Nick Grant, vice president of countrywide product management and technology, Liberty Mutual. “For the consumers that are now driving differently, UBI offers an experience tailored to how they are driving today. It allows them to save money on insurance in a moment when they may be facing financial pressures that, for many, are unprecedented."

In general, UBI programs track a few main data points: braking, acceleration, speed, time of day on the road and number of miles driven. All drivers have the potential to save on their premium if they drive safely within these parameters, but Brown has seen the programs benefit drivers who have historically faced the highest rates: young drivers.

“The mobile apps on UBI programs can track if you're speeding and they'll send a notification if the driver has gone over the speed limit," Brown says. “Every time there is driving behavior outside of the things the carrier is looking at, it could flag you—and parents like that."

Texas ranks fourth highest for average auto insurance rates nationwide, according to Insure.com. And Houston is the fifth largest city in the contiguous U.S. in terms of area and the fourth largest by population. So the ability for Brown's agency, which quotes around 3,500 auto policies per year, to offer UBI to more receptive insureds is a gamechanger.

“You're probably looking at at least $1,500 per year to insure a vehicle. Some people weren't so interested in programs and these discounts, but they definitely are now. They realize they can save 30%," she says. “They can individualize their premium so that their driving behavior dictates their rates or their discounts more so than ever before."

What Consumers Want

When businesses closed their doors under stay-at-home orders, employers and employees were forced to adapt to a new reality. For some businesses, that meant moving to a 100% remote workforce—a reality that has become permanent. Among them is Nationwide Insurance, which has permanently moved more than 98% of its 27,000 employees to work from home over five business days and plans to shrink from 20 physical offices to just four.

Also, social distancing guidelines are making it impossible for even the largest Fortune 500 companies to ask employees to show up to the office even a couple of days a week because of the office space required. Tech giants such as Apple, Twitter, Facebook and Google have all implemented generous work-from-home policies, while some expect their employees to work remotely until 2021 at the earliest. As a result, auto insurance needs to change.

“People want coverages and rates that match their lifestyle," says Teresa Scharn, assistant vice president, personal lines product development, Nationwide Insurance. “UBI is becoming increasingly important for them and it's increasingly important for agents to leverage it."

At Nationwide, Scharn has witnessed an overall increase of about 6% of consumers selecting UBI products while sales for pay-per-mile products have more than doubled. Additionally, for agents who were already selling UBI products to 30% of their customers pre-coronavirus, their UBI sales have increased by another 20%. Furthermore, in the next five years, Nationwide expects 70% of new business to select UBI products.

“Telematics products are going to be the future of auto insurance," Scharn says. “Today, over a third of our customers are selecting telematics at new business, and we see people of all ages selecting telematics—if you want more control over your insurance rates, if you are a lower mileage driver, if you feel you are a safe driver or if you want to become a safer driver. That spans all different types of customers."

Data Decisions

In May, even as states began phased reopening, interest in UBI products remained high and was still three times higher than the baseline interest before the pandemic, according to J.D. Power, suggesting that the UBI trend could be permanent. Moreover, it is a sign that consumers could be willing to cast aside their concerns about sharing their data to save money amid a flailing economy and changing personal circumstances, such as working from home and joblessness.

“People that have been either directly or indirectly affected by the pandemic are trying to find ways to save money and cut back on expenses," Super says. “The data aspect and trust are huge hurdles for consumers to get over, but I think people are a recalculating that trade-off."

For consumers who want to save but are still hesitant about the prospect of sharing their information, most carriers offer flexibility. Some applications provide the option to delete certain drives, some offer the opportunity to turn the app off, while some only require a 60- or 90-day trial period to better understand an individual's driving patterns and habits. On the flip side, ongoing monitoring of driving behavior—a set-it-and-forget-it approach—is an option for drivers who are looking for deeper savings and feedback for safer driving.

Between them, the largest insurance carriers have already collected billions of miles of driving data and the more they collect, the more benefits they can promise. Essentially, the more data carriers can accumulate, the more accurate ratings can become, the more targeted feedback drivers can receive, and the more savings drivers can accrue.

When choosing a carrier, “scale does matter," Scharn explains, “because we can take that information and leverage it to create the best customer experience. In the future, UBI will get even more effective from taking this information to help consumers understand how they could drive safer, such as recommending new routes."

“It's a win-win situation," she adds. “Our intention truly is to give the benefit back to the customer, help them become safer drivers and then provide lower premiums."

Agent Role

In addition to hesitations about sharing data, “the two biggest misconceptions about UBI are that it's complicated and that someone has to be a perfect driver or just the right fit to benefit from UBI," says Anita Miller, product development manager, Progressive Insurance, who notes that two-thirds of drivers that complete Progressive's Snapshot program earn a discount based on their driving.

The independent agent stands in a unique position to assist drivers to truly personalize their auto coverage for households and individuals at the best price without compromising coverage. Through in-person and personal digital interactions with their clients, independent agents can educate clients and recommend the best-fitting UBI program and policy.

“Agents are a critical resource in educating customers about UBI, as they can help their customers understand potential savings opportunities available to them while encouraging safer driving behaviors these apps and programs are designed to promote," says Tom Torcia, managing director of emerging auto markets for personal insurance, Travelers. “Today more than ever, consumers are looking for personalized offers and pricing from their auto and home insurance providers."

For support with UBI programs, agents need to look no further than their carrier partners who “are excellent at providing training," says Elizabeth Taylor Kalo, agency president, Robert Taylor Insurance Agency in Lorain, Ohio. “When customers receive their device in the mail, we offer to install it for them—there is a lot of training available on that."

“When Snapshot was first rolled out, we all received an actual device to see what it looked like," she adds. “I feel like if my agency doesn't offer it, the client could go to another agency that does, and I would lose that client because they're so price-conscious."

Moreover, each program is “vastly different," Brown says. “If I can learn more about how clients drive, when they drive and who is driving, I can cherry-pick the right program. For example, if someone is concerned about being up-rated, I wouldn't put them with a carrier that would do that."

“The beauty of using an independent insurance agent is we know how the programs are different," she adds. “Everyone drives differently. If a client wants to save money, we can help find the program that will maximize their savings."

Will Jones is IA managing editor.