Usage-based insurance: fears over privacy or safer streets?

Device measures hard braking

 

cb daniel dionne cc toys cars 665Since launching in Canada this spring, most of the focus on usage-based insurance (UBI) has revolved around fears of privacy violations. When considered more carefully, however, these fears may actually be masking the transformative and perhaps consumer-friendly potential of this new type of big data technology.

To take a step back, UBI programs (also known as telematics and pay-as-you-go insurance) rely on a small device plugged into the OBDII (or OBD-2) port located on the dash or under the steering wheels of cars manufactured after 1998. The device essentially tracks your driving behaviour—it detects any hard braking or sudden acceleration (signs of careless driving), your mileage, and the time of day you’re out and about. In Canada, these devices are currently only offered by Desjardins through their Ajusto and Intelauto programs in Ontario and Quebec. If a Desjardins customer’s driving data shows they are a less risky driver than most (driving less than 15,000 km per year, for example, or driving primarily between 5 a.m. and 10 p.m.) they can qualify for a discount on their insurance policy of up to 25%.

In the wake of a summer filled with headlines about NSA privacy violations, alarm bells are ringing loudly at the idea of “big brother” insurance providers wanting more information about what customers do when they’re behind the wheel. Some envisioned a future in which those who didn’t participate in UBI programs would face higher rates for keeping their driving habits private.

To put these concerns into perspective, it should first be pointed out that these programs are completely optional. Desjardins has also been quick to respond, stating that factors like driving speed are not tracked by the telematics device.

Joe Daly, spokesperson for Desjardins General Insurance, explained to Canadian Business that individual driving data isn’t something that the firm even has access to. Instead, the data is collected by independent Quebec company iMetrik, which calculates the discount a customer is eligible for and sends only that individual number back to Desjardins.

And what about punishing drivers for opting out of telematics?

As James Colaco, senior manager of Deloitte Canada’s insurance practice points out, in the competitive world of insurance sales “it would be incumbent on the insurers to treat their customers well.” Penalizing individuals for opting out of a UBI program “just wouldn’t be a customer-centric thing to do.”

Regulators such as the Financial Services Commission of Ontario have also strongly expressed the opinion that telematics devices should be used primarily for the benefit of the consumer, and to help individuals become better drivers (as evidenced by a presentation given by the FSCO at a UBI Symposium this past February).

What’s more interesting, and perhaps transformative for the insurance industry, is the iMetrik-collected data that Desjardins eventually does get to look at. The driving tendencies of those participating in the telematics programs (so far, about 40,000 customers have enrolled) are stripped of any personal identifiers and sent to Desjardins as an anonymous, aggregated data set—wouldn’t it be interesting to know if these statistics could help to reclassify who the riskiest drivers are?

For decades, we’ve based our insurance risk classification systems on simple factors such as age, sex, and geographic location. But not all drivers in these categories are created equal. Pete Karageorgos, manager of industry and consumer relations in Ontario for the Insurance Bureau of Canada, noted that telematics are already helping drivers who don’t believe they carry as great a risk as the rest of their statistical group to get a discount.

“I’ve heard many consumers saying, ‘Why should I be grouped in with those other people my age or people who drive for business?,’” he said.

“If individuals truly believe that their driving habits are better than the group that they are grouped into… Well, here’s a way to really prove and track that.”

On a wider scale, data gathered from telematics could also start to paint a different picture of who carries the most risk when they get behind the wheel. Is it possible, perhaps, that some teenage girls are just as risky a class of drivers as some teenage boys? Big data might start to illustrate that in a more meaningful way.

Big data is “potentially a disruptor” for the auto insurance industry, said Daniel Shum, a partner at Deloitte’s insurance practice. Telematics could lead to better and cleaner data, “which means the use of predictive analytics in a more prevalent way,” he added.

“From an insurer’s perspective, certainly using that data to optimize risk eligibility and pricing is really what I would call the panacea of insurance,” said Colaco.

“You want to be able to match a price with risk in this business… and getting the empirical data that telematics allows, allows you to achieve that.”

If telematics does have a greater effect on insurance classification, it will likely be an eventual rather than overnight transformation. Shum and Colaco point out that any reclassification of risk would be heavily scrutinized by Canadian regulators, in order to make sure that changes aren’t self-serving on the part of policy providers and in fact benefit consumers.

“If carriers have better data, and they’re able to say, look, we can measure risk better… and in the long run it’s better for consumers, then the regulator [would be] okay with that,” said Shum.

Presumably, the evolution of telematics could lead to the discovery of bad driving habits (evidenced by someone making rapid lane changes at 2 a.m. on a Saturday, for example), helping insurance companies to weed out bad drivers and make roads safer.

A bigger sample than Desjardins’ current roster of 40,000 customers would also be needed for telematics to provide a reasonable amount of data though, and so far, consumer concerns about UBI devices are still riding high.

In September, Glenn Renwick, CEO of American insurance agency Progressive Corp. (the largest provider of UBI programs in the States), revealed that 40% of Progressive customers were adamantly opposed to the idea of having a telematics device installed in their car.

In Canada, Deloitte recently conducted a phone survey of 768 Ontario and Quebec home and car insurance policyholders, asking if they would be interested in a device that tracks their driving behaviour. 61% of the respondents said no, and of this majority group, 63% said they wouldn’t install the device due to privacy concerns—in total, concluded Deloitte, about 40% of their survey respondents were concerned about the effects of telematics on their privacy.

As Shum puts it, big data and its effect on the Canadian insurance industry will likely be “more evolutionary than revolutionary.”


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