Verified-Mileage Auto Insurance


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.

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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

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.

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.

Welcome to Telanon’s blog!  This is where you find in-depth discussion.  If you want to start with a higher-level introduction, please visit our website first at http://www.telanon.com .

We are focused on “usage-based” or “green” car insurance for consumers.  All versions give discounts for proving less-than-average driving, and some offer higher discounts for also proving  safer-than-average driving.  It’s called “green” because: 1) it saves many consumers money; and 2) it reduces pollution because some consumers will drive less to save more.

These policies are still quite new in the United States, even though Progressive Insurance began their first field trial named Autograph™ in Texas in 1999.  They followed up with a second field trial, Tripsense™, in Minnesota, Oregon, and Michigan starting in 2004.  Finally in 2008 they announced the start of their planned nationwide launch of Pay As You Drive® product MyRate®. (All trademarks identified so far are owned by Progressive.)

There had been a growing awareness of usage-based auto insurance in the industry, especially in Europe where a growing number of products were launched.  However, Progressive’s MyRate announcement was the trigger in the U.S.  for what many believe will be a chain-reaction of competitor product introductions.  The Brookings Institute predicts waves of consumer adoption, leading eventually to most of their vehicles being covered by some form of usage-based insurance.  Those that are not will belong to consumers in one of three categories: 1) higher-mileage drivers; 2) higher-risk drivers; or 3) extreme privacy advocates who won’t even allow their vehicles’ odometer readings to be taken and provided to insurers for low-mileage discounts.

Progressive has earned a reputation for disrupting their own industry with innovations that give them first-mover advantages. An earlier example was direct auto-insurance sales via their Internet website. Many competitors followed their lead, once it proved popular and profitable.

Usage-based auto insurance is shaping up to follow the same pattern. Progressive recently reported that half of the consumers they surveyed were interested in usage-based auto insurance. That’s consistent with an estimate by the Brookings Institute that nearly two-thirds of consumer vehicles should save money with usage-based policies, since they drive less than the overall average miles each year. (It’s over 50% because it involves a weighted average, and the higher-mileage vehicles drive significantly more miles than the non-weighted average.)  Also, about a quarter of the consumers Progressive has offered MyRate have actually signed up.

This post is only intended as an introduction. There is much more to discuss for anyone interested in the topic.  This blog is our forum for such discussions.  Feel free to comment and/or suggest topics.  Any comments are welcome, as long as they focus on issues and not people, and are not abusive or even irrelevant — based on our sole judgment.  We not only don’t see the point in offending anyone; we also don’t want to waste your time.

We’ve mentioned Progressive above, only because their actions were largely responsible for accelerating, but not starting, the trends towards usage-based auto insurance.  In future posts we will also identify other insurers and/or other types of firms in the overall auto-insurance ecosystem when our discussions touch on areas involving them.

Telanon, Inc. is a privately-owned startup based near Atlanta, GA.  We are launching services related to usage-based insurance that we believe are useful to consumers as well as insurers and other organizations in the industry.  We will provide more details in future posts.

Until then, you can get a good idea of our current plans by visiting our website http://www.telanon.com after it is updated a few days from now.  We’ll post a notice here when it goes live, as well as on Twitter as @telanon.  You can see all our public posts there  at http://www.twitter.com/telanon .

We look forward to your comments and suggestions, and to our discussions.