Usage-Based Insurance

Today the Hartford told industry analysts they are launching TrueLane usage-based insurance early next year.   Their head of consumer insurance Andy Napoli said it will measure how well customers drive, but did not say whether it will initially base discounts on driving behavior.

Several other insurers launched usage-based products that collect driving-behavior data but at first only offered discounts based on mileage.   In those launches, the driving behavior data are likely used to develop discount algorithms to offer behavior-based discounts in future versions.  Two products seeming to take that approach are Travelers IntelliDrive available in Illinois, Ohio, Oregon, and Virginia, and AAA NCNU uDrive in Nevada.

If TrueLane does provide discounts based on driving behavior, then it will be the fifth  insurance of that type in the U.S. market.  The pioneer was Progressive, whose SnapShot is now available in 39 states and DC.  The others are: Liberty Mutual Safeco unit’s Rewind offered in Colorado; Allstate’s DriveWise available in Illinois, Arizona, and Ohio; and State Farm’s Drive Safe & Save in Illinois.  (State Farm offers Drive Safe & Save in other states, but only in Illinois does it base discounts on driving behavior so far.)


Two related insurance companies, Sequoia and Personal Express, were approved on Earth Day to offer “green” car insurance in California.  They are the smallest insurers by far to win  approval.  In 2009 the larger of the two, Personal Express, was ranked 101st in California private passenger insurance market share, at about 4% of the market.  Sequoia was ranked 151st, with .05% share.

In the approved filing, specific details are given for AccuRate Express, the plan for Personal Express.  Some interesting features are:

  • Like already-launched plans by State Farm and Auto Club of Southern California (AAA), customers may self-report odometer readings
  • Unlike the other two plans, AccuRate Express does not provide for odometer reporting by a “technological device” — either factory-installed (OnStar, under State Farm’s plan) or aftermarket (a Delphi-supplied plug-in device for Auto Club, and OnStar’s rear-mirror-replacement unit for State Farm, both available later this year)
  • Instead, AccuRate Express gives a 1% larger discount compared with simple self-reporting for either: 1) providing a recent invoice with odometer recorded from an oil change, tune-up, smog test, or car repair; or 2) driving to their office to have the odometer read

Already it is clear that verified-mileage plans will offer California consumers a number of new choices for insurance.  Their challenge, as for consumers outside California, will be to sort through the details to find the lowest-cost plan for each vehicle.  At least in California that only depends on how far a vehicle is driven each year, not on how it’s driven too — at least for now.

Last week CSE Safeguard Insurance Company proved that verified-mileage auto policies won’t be limited to the largest insurers in California.  They are 70th largest in the state, and plan to offer their verified-mileage SAVE program immediately after approval.  The only insurers filing before them were the state’s largest auto insurer State Farm and second-largest Auto Club of Southern California.  Both were recently approved and launch this month.

Here is how these three verified-mileage plans are similar:

  • Any privately-insured vehicle can be covered through “self-reporting” of odometer readings by the vehicle owner to the insurer
  • The insurer reserves the right to independently verify accuracy of such “self-reported” odometer readings

Here are some ways they differ:

  • CSE only offers the “self-reported” alternative; State Farm also offers a “device-based” alternative for OnStar equipped vehicles,  and Auto Club offers a “device-based” choice using a telematics device supplied by Delphi that can be attached to most vehicles
  • State Farm and Auto Club start with a fixed discount for the first policy period, but CSE does not; their SAVE program  immediately starts its full verified-mileage discount based on expected annual mileage
  • CSE “trues up” mileage for their discount calculation at the end of each policy term based on actual miles driven; fewer miles than expected earn a refund, and more miles than expected require more payment
  • Approaches to independently verify “self-reported” odometer readings may be quite different
  • State Farm may require independent odometer readings
  • CSE may accept a recent photograph of the odometer, a recent oil-change invoice with mileage indicated, or a recent smog certification showing an odometer reading
  • Auto Club may use any approach that meets regulations

Today Allstate introduced Drive Wise®, their usage-based auto insurance that seems designed to compete with Progressive’s Snapshot℠.   Details can be found in their press release here: .

Here is how these two innovative auto insurance products are similar:

  • The policy holder attaches a wireless unit to a 1996 or newer vehicle’s under-dash connector to transmit driving data to the insurer
  • The product is “behavior based”, meaning the insurer monitors when and how the vehicle is driven (but not where), in addition to how much
  • The consumer only learns the amount of discount after signing up for the policy, driving data are transmitted, and the insurer evaluates it

These are their differences:

  • Allstate’s Drive Wise is only available in Illinois, but planned for more states early next year.  Progressive’s Snapshot is already in 25 states.
  • Drive Wise offers a maximum 30% discount.  Snapshot’s maximum discount varies somewhat by state, but is also 30% in some states.
  • Drive Wise offers an immediate 10% discount, and substitutes the earned discount of up to 30% later, based on miles driven and a calculated driving score.  Snapshot usually (but not yet in every state) starts its earned discount after 30 days of driving.
  • Drive Wise likely requires its device to remain attached to keep earning discounts.  Snapshot usually (but once again, not yet in every state) can be returned after the first 6-month policy, and a renewal discount based on the six months driving will be applied to the renewal policy.

All usage-based auto insurance will offer consumers who drive less than average a way to save money.  Plus, behavior-based policies like Snapshot and Drive Wise can save lower-risk drivers even more.

Progressive says they plan to continue their aggressive rollout of usage-based insurance product SnapshotSM, also called Snapshot DiscountSM.

From Progressive’s 3rd quarter 2010 financial report, released yesterday:

SnapshotSM, our usage-based insurance product, is now available to Direct auto customers in 24 states, including 5 states added since the end of the second quarter 2010, and Agency auto customers in 12 of these 24 states. We plan to continue expansion of Snapshot into about 15 additional states, depending on regulatory approval and business results, over the next nine months.

Progressive CEO Glenn Renwick’s comments in today’s management teleconference with industry analysts:

Along with that, we actually expect probably later in the first quarter, maybe around the cusp of the first and second quarter, to be going more national with our Snapshot advertising. So we have some Snapshot advertising designed already and available for a local market test but we’ll wait until we have a slightly increased number of states with our Snapshot. We’ve got 24 there in direct today. I think we put that in the 10-Q, and we’ll have at least 75% of the country covered by that offering, and we’ll nationally advertise it around the end of that quarter.

In case anyone wondered how serious Progressive is about deploying usage-based auto insurance, they gave a clear answer today: very serious.  At least that’s our take on the following section from their quarterly report to investors published earlier today:

… our usage-based insurance product is now available to Direct auto customers in 23 states, including 4 states added in July 2010, and Agency auto customers in 12 of the 23 states. We plan to continue expansion of our usage-based product, including the reformulation to our Snapshot DiscountSM product, into about 15-20 additional states, depending on regulatory approval and business results, over the next twelve months.

To avoid losing their lower-risk/higher-profit customers to Progressive, auto-insurance competitors should launch their own usage-based products soon.  In light of Progressive’s recent patent-infringement lawsuit against Liberty Mutual, they are likely to start with Verified-Mileage policies since Progressive has never indicated the limited approach used by those policies would infringe their patent claims.

Another reason insurers other than Progressive may launch Verified-Mileage plans first is because they involve only one factor based on data captured from customers’ vehicles, which is actual miles driven. Plus, Verified-Mileage class plans filed in California by State Farm and the insurance affiliate of AAA – Southern California provide details for how they will use actual mileage to calculate potential discounts.  These are useful reference points to insurers developing Verified-Mileage plans

That is a much simpler situation than those involving advanced, “behavior-based” plans like Progressive’s MyRate® (now being modified and rebranded as SnapshotSM).  To develop their more-complex algorithms using additional factors, Progressive collected and analyzed over a billion miles of driving data from customers, starting in 1998.  They are keeping details of their algorithms confidential for competitive purposes, a policy they defend based on their many years’ effort and cost to develop them.

A growing number and variety of usage-based auto insurance plans are coming to your state soon.  In five to ten years most consumer vehicles will likely be covered by usage-based insurance —  triggered by Progressive’s introduction and aggressive roll-out of this industry-disrupting innovation.

Progressive recently introduced significant changes to their usage-based auto insurance program.  Earlier described as a Pay As You Drive® program named MyRate®, it is now simply called SnapshotSM or Snapshot DiscountSM.  (Those trademarks and service marks are owned by Progressive.)

The new name reflects changes to overcome detractions identified by surveyed  consumers, according to Progressive’s  senior management during their Annual Investor Relations Meeting last month.  The new SnapshotSM program (but see notes below) offers:

  • an immediate discount after 30 days for lower-risk driving
  • a renewal discount for lower-risk driving during the six-month policy
  • removal of the Snapshot monitoring device after the first six months

Progressive’s earlier MyRate® program did not apply an earned discount until a following six-month renewal policy term, and required that a MyRate® device stay continuously attached to collect driving data.

Progressive’s management stated they had been target-marketing MyRate® but believe SnapshotSM will have broad appeal.  It is now available in 22 states, should reach “half the country” by year-end, and will be further expanded next year.  With positive early results, they “expect to be broadly advertising” SnapshotSM in 2011.

Progressive’s SnapshotSM website gives a likely preview of their mass-market advertising plans.  Earlier MyRate® short videos on installing the in-vehicle device and accessing reports have been removed.  Instead, the SnapshotSM-rebranded website features smiling spokesperson Flo with a large vintage camera ready to take the viewer’s picture and the caption “Say savings!”

Note 1: Progressive’s usage-based programs originally introduced in about 20 states as MyRate® are already being rebranded as SnapshotSM.  However, program details vary by state and some of those do not yet fully match the SnapshotSM approach identified above.

Note 2: Under the SnapshotSM program, Progressive reserves the right to have a new driving-data “snapshot” captured to maintain a usage-based discount.  Requests will likely be triggered by changes in vehicles, drivers, etc. that can affect driving mileage, times,  and/or behavior.

Very soon after State Farm broke the ice with the first filing for Verified-Mileage auto insurance in California, an insurance affiliate of AAA of Southern California has become second to file.  Insurance Exchange Of The Automobile Club is requesting a December initial launch, only three months after State Farm’s.  Their policies will be offered exclusively through AAA of Southern California.

So far, these filings are following the same order as the market-share rankings in California.  In 2009, State Farm was #1 with about 13% market share, and Insurance Exchange Of The Automobile Club was #2 with 8%.  It will be interesting to see which firms file next, and how quickly.  (Allstate had #3 market share with 7% and the insurance affiliate of AAA – Northern California, Nevada and Utah had the #4 position with just under 7%.)

Here are highlights of AAA of Southern California’s plan versus State Farm’s:

  • Both keep their earlier “estimated mileage” alternative available
  • Both offer two verified-mileage alternatives
  • Higher discounts go to consumers using “technological devices” to verify their mileage
    • State Farm will initially offer this for vehicles with OnStar
    • AAA’s “Telematics Verified Program” will offer this for any vehicle and compatible AAA-approved “technological device” (which can cover over 90% of current consumer-owned vehicles plus all new models)
  • Lower discounts go to consumers not using “technological devices”
    • State Farm will allow consumers to self-report odometer readings, but be required to verify those readings if requested
    • AAA will allow any approach for reading and reporting odometer data that is allowed by California regulations
  • Either way, significant discounts are available to consumers for vehicles driven less than average mileage each policy term
    • State Farm offers up to 45% discount for self-reporting, and up to 49% for OnStar vehicles
    • AAA also offers up to 45% discount for self-reporting or through other non-device methods, and up to 50% for use of any approved “technological device”

The real comparison, of course, is between the actual dollar amount of your insurance premium after all discounts are counted,  including these for verifying mileage.  The focus in this post is California, but the same lesson is true in any state where  “green” car insurance of any type is available.  We will address in future posts the easiest ways to fully compare “green” car insurance with traditional alternatives to find your lowest-cost policy.

As mentioned in our last post, Verified-Mileage is the most basic version of Usage-Based or “Green” car insurance.  As opposed to “Behavior-Based” approaches, the only vehicle “usage” it considers are the actual miles driven — not when, how or where they are driven.

The State of California conducted a year-long regulatory process before issuing their final regulations in October 2009 for  “Pay-Drive”.  (They coined the phrase, apparently to use a descriptive name like the U. S. trademark Pay As You Drive® owned by Progressive Insurance, while avoiding legal issues.)  As the easiest starting point, and in deference to concerns raised by many privacy organizations, the California regulations prohibit insurers from using data from customer vehicles to set rates, other than to prove “actual miles driven”.

After six months with no insurer filing to offer a Verified-Mileage policy,  it was just announced that State Farm filed in mid-April.  If that filing is approved, they will launch their California Drive Safe & Save™ Verified-Mileage policy in September.  They already offer a Drive Safe & Save™ policy in Ohio, but some aspects are different, likely due to Ohio’s and California’s unique regulatory requirements.

This should trigger California filings by other insurers, for the same reason that insurers like State Farm have responded to Progressive’s earlier launch of Behavior-Based Pay As You Drive® policy MyRate®.  The first-mover with Usage-Based Insurance in a market — Progressive in 19 states so far, and State Farm in California — plans to win as many new, lower-risk-but-profitable customers as possible.  Competing insurers either follow suit or stand to lose their existing lower-risk customers to the earlier-movers.

That type of reactionary response is well-known in the insurance industry, and goes by the name “protecting your current book of business”.  Insurers never issuing Usage-Based policies in a market are likely to lose most if not all of their lower-risk (and higher-profit) customers, since they can get lower premiums through Usage-Based policies offered elsewhere.

Crystal-ball gazing to predict the future of Usage-Based Insurance is nearly over.  Very soon everyone will see how this looming battle among insurers actually plays out.  It shouldn’t take long in California, the country’s largest auto-insurance state market, now that the country’s largest insurer State Farm has fired the first shot.

Unless you follow the industry very carefully, it’s easy to be confused by the many “flavors” of usage-based or “green” car insurance.  Here’s a menu.

Usage-Based Insurance is the most generic name, and sometimes goes by the acronym UBI.  It simply refers to the approach of basing insurance, at least partly,  on actual usage.  For vehicles, it is their “usage”, which can mean many things — leading to the other “flavors” below.  In the context of automobile insurance, it is understood to mean Usage-Based Auto Insurance.

“Green” Car Insurance is the name we use with consumers for Usage-Based Auto Insurance.  As we explain on our website and earlier on this blog, it is “green” for two reasons: 1) it saves most consumers money; and 2) since it motivates less driving to save even more money, it reduces car emissions.

Pay As You Drive® is a trademark of Progressive Insurance in the U.S. and other companies in several other countries.  So in the U.S. it should only be used as a trademark with Progressive’s products.  However it is often used as a generic equivalent to Usage-Based Insurance, especially in Europe.

Verified-Mileage is the most basic type of Usage-Based Insurance, since the only “usage” it considers are the actual miles “used” driven by the vehicle.  As implemented in the United States, it substitutes for “estimated mileage” that was often considered in traditional policies.  Other rating factors are still used, and a discount is offered to the “normal” premium the policy owner would pay if mileage were not verified.  In fact, this is the only type of Usage-Based Insurance currently allowed in California.  In addition, their regulations only allow the insurers to permit certain approaches for verifying actual miles driven.  More details about “green” car insurance and California will be provided in our next post.

Behavior-Based is the generic name used by Progressive Insurance and others to describe Usage-Based Insurance that considers aspects of vehicle “usage” than simply actual miles driven (like Verified-Mileage policies).  These additional data can be when, how, and even where the vehicle is driven.  It is “behavior-based” because all of that comes from the “behavior” of the drivers.  In Europe a number of Behavior-Based policies capture their data directly from computer/communications, or “telematics”, systems in the vehicles, which have GPS to provide other services as well.  OnStar is the best-known telematics system in the U.S., installed in over 5 million vehicles and advertised heavily on television and radio.  In Europe the Behavior-Based policies often use GPS location data, but none currently do in the U.S.  Progressive’s first field trial named Autograph™ did, but when they launched their second field trial named TripSense™ in 2004 it did not.  Instead, like their current product MyRate®  undergoing national roll-out, it considered miles driven, when the driving took place, and how the vehicle was driven.  Like Verified-Mileage policies, these Behavior-Based policies also still use traditional rating factors to determine the “normal” premium for a vehicle under their policy.  The difference is that the discount calculated by the insurer’s proprietary rating algorithm takes into account not just proven actual miles driven, but also the “behavior-based” data as well.  For that reason, they can offer higher discounts to vehicle A that is driven at times and in ways that are considered lower-than-average risk of having an accident, versus vehicle B that is driven the same number of miles but with no lower-risk driving behavior counted.

Safe-Driver is a generic name sometimes used for “Behavior-Based” since discounts are offered for lower-risk, or “safer”, driving behavior.  In both cases, it is important to realize that the discount is based not just on what might normally be considered “safe” driving, which is the “how”, but also on exposure to more or less danger due to the “when” driving takes place.  For instance, even if you didn’t just leave the bar when you’re driving at 3 a.m. on Sunday morning, there are others who might cause your accident who did.  Plus, you are more likely to be sleepy at that hour.  The rating algorithms are not based on speculation like this, however, they are based on hard data from accident records and driving data for the same vehicles.  Progressive, for example, used nine years’ data from their field trials starting in 1999 to develop and refine their rating algorithms to calculate discounts based on actual mileage and driving behavior for MyRate® prior to its launch in 2008.

That’s the menu of Usage-Based Auto Insurance flavors.  We hope it helps avoid at least some potential confusion with terminology in this new “green” car insurance world.

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