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January 21, 2015

Usage-Based Insurance Strategies: A Real-Time Solution that Lags

Insurance companies are logical early adopters of technologies. Accountability, security, verification, and usage are all drivers for insurance to be raised and lowered. It would also be a key aspect of redesigning services. While the insurance companies are exploring, they are very cautious about the impact. Insurance companies understand that in the Internet of Things, insurance companies can change or modify the nature of policies to expand services. For example, pay as you drive and pay how you drive are services that have come of age because of the adoption of standards and the use of the Internet. While remote patient care and other coverage would equally benefit, automotive has been the first mover. This is probably because the relationship of savings and risk management are direct between the insured and the insurance company.

Speaking with Donald Light, the director of the Americas property/casualty practice at Celent, I learned that he believes the insurance companies are testing the waters and conducting R&D in real time. Critical to their thinking is the standard of measure known as adverse selection. Adverse selection occurs when an underwriter assumes more risk than is appropriate because of poor information or misinformation. Insurance companies are more than willing to see higher risk drivers choose other insurance companies. Utilizing usage-based insurance systems is a way for the risk pool to be adjusted based on the information of a driver’s performance.    

The concepts of UBI have been at the heart of many telematics developments over the last 30 years. However, the adoption has been slow, and standardization has been fragmented by region.

We are at a point where alternative smartphone applications and fleet management using GPS are trying to deliver applications that do a portion of what UBI services accomplish. In addition, the implications of smart device applications on traditional standards do work. 

In the United States, we have On-board Diagnostics II, which has had so many predecessors that OBD-I was a retroactive name. In Europe black box solutions that utilize satellite have been an alternative that has hindered European OBD. OBD-II developed in 1996 and Heavy Duty OBD, the truck standard developed in 2010, have diagnostic information that goes beyond GPS capabilities to estimate braking and driving speeds and include engine diagnostic information. 

The problem though, is that these standards had been under development since before the advent of the smartphone. The adoption of the standards has been slow in the industry.  We are in a strange state wherein many companies are finding alternative solutions to the auto and truck manufacturers’ adoption of these standards. In addition, some insurance companies that use the OBD for adjusting services, deliver a relatively Spartan user interface that does little to modify the customer’s behavior.

While in the U.S. the commercials for Progressive would indicate that the company is the only one using a UBI, which it calls SnapShot, the reality is that half the industry has programs in place that take advantage of the technology.

In Europe, black box services have been implemented by a lot of insurance companies including Admiral/Bell, Alka Forsikring, Amaline, Deutsche Assistance Telematik, Zurich Italia, and dozens more. Octo Telematics is a dominant player in this space with 80 percent of the major insurers utilizing its solutions.

In the U.S. the companies that have adopted UBI have also adopted clever names as shown below.

UBI Service

Insurance Company








Right Track

Liberty Mutual









State Farm Insurance





While some systems are Spartan, others provide a great dashboard with useful insight. Others expand the services to offer more than pay how you drive. Accident support services, proactive maintenance, and theft security are among the enhancements.

However, the transition to using the OBD/HDOBD for fleet management seems to be even slower than on the consumer side. Only Travelers incorporated the use of OBD/HDOBD systems to its fleet management services. It is rare that fleet management referenced UBI services or that other M2M/IOT services were referenced on the site. When it comes to platforms, most fleet management systems work independent of insurance companies. While the platform manufacturers are trying to become universal, the insurance companies that support fleet management are specialized.

David Luken’s LexisNexis UBI Study Telematics report suggests consumer and small business attitudes toward UBI are changing. One problem is that traditionally, insurance is seen as a fixed cost, and the consumers had concerns that UBI may lead to variable costs beyond the budget.  Now, however, the driver to lowering premiums is a key incentive. His analysis is that managers of small fleets have lower awareness but higher demand for UBI when compared to consumers. A quarter of small fleet managers are aware of UBI programs, yet 27 percent are projected to adopt UBI for a 10 percent discount. Additionally, small business with small fleets of six to 10 vehicles represent a sweet spot where insurance companies can bundle usage-based insurance with fleet management solutions.  However, the current UBI offerings are primarily consumer focused.

James Brehm of Brehm and Associates points out that UBI services at the present time are focused on customer acquisition more than value-added services. Likewise, fleet management systems are usually optimized for the goods transported, agra, cold chain, etc.  Like the relationship to anti-theft systems, insurance companies make no distinction between the values of one fleet system over another.

The opportunities then to expand and explore new services seem to be taking a back seat to the other services. While insurance companies are known to mine social sites to gain insight on customer risk, they have not tried to apply the lessons of social networks to UBI strategies.  Celent’s Light points out that awards and gamification solutions can be implemented with OBD-II. Behavior modification already occurs with the beeping that happens from Progressive’s Snapshot system as well as others. However, Progressive has the OBD returned in three months and therefore the behavior may revert.

The opportunity to sell additional services might be of more interest to the auto manufacturers themselves as they attempt to expand the value of their vehicles. In Europe, BMW, Daimler, Skoda, and Subaru are utilizing the services of Octo Telematics as well. Auto makers leasing services are already actively using telematics to manage theft and retrieval solutions.

Manufacturers are seeing the value of aggregate crowd sourcing information. Friends at IBM have pointed out that reactions to weather such as fog, rain, and snow storms are reflected in driver behavior that can be mined for better feedback. This has changed the dashboard mapping systems for autos from lightweight GPS-oriented systems to active mapping solutions that are delivered from the cloud.

Speaking beyond the insurance company brings us to the point where we can talk about applications. While most smartphone applications are about entertainment in the car, some solutions for your smartphone are either alternative to OBD or supplemental for the benefit of the driver.

Engine Link-OBDII is an iPhone application that uses LELink-Bluetooth Low Energy OBDII Adapter or an ELM 327 Wi-Fi adapter that enables communication to the iPhone. From there, drivers have adaptable dashboards of information on their iPhones, including further information and control over the Boolean check engine light that so many of us have had to ignore for lesser fault problems. While Engine Link is one of a very few solutions for the iPhone, for Android phones solutions there are more than 100 equivalent applications.

A smartphone can emulate much of the value of an OBD-II solution which is what Driveway Software advocates. Driveway Software points out in its white paper that typically insurance companies have an upfront cost of more than half a million dollars and each UBI costs more than $200. With the upfront costs, the next issue is data accumulation, where often there is insufficient information for the true risk analysis to take place. The Driveway Software sits on the smartphone and while not connected to all the data, it can provide lots of data including vehicle signature, miles driven, time, day, location driven, acceleration, braking, cornering, and speed.

Much of the cost referenced in the analysis is based on the use of cellular technology. For consumers OBD II devices using the smartphone with either Bluetooth or Wi-Fi have costs ranging from $25 to $50.

Traditionally, the concern about adverse selection has made insurers spend more on gathering performance indicators in aggregate, and it may be that the consumer apps represent an opportunity for Arbitron-like service. Like Google, Facebook, Twitter, and other web solutions these big data mining services are not perceived by the customer directly and it may be that popular apps such as Waze or Uber will expand their services to include this aggregate value.

Light points out that “IoT is a powerful predictor of loss, which is core to insurers’ risk analysis business.” This experimental stage gives the perception that not much is happening, when in reality he expects the impact of IoT UBI solutions to be significant and a guide for other policy programs as well. As Sprint points out in its blog, in five years, all of this will be old hat. When the inflection point occurs is not clear, but it is clear it will happen.

The (Very Eclectic) Usage-Based Insurance Hot List

Admiral’s Bell insurance using a black box solution in the U.K.


Alka Forsikring using a Octo Telematics and a black box solution in Denmark



Drivewise an OBD-II solution


Allianz utilizing a black box solution in Europe


Coverbox, a black box solution


DriveStyle, a U.K. implementation utilizing Coverbox



Driveway Software, the contrarian view of OBD-II solutions that supports UBI PAYD and PHYD


esurance InDriveConnect, an OBD-II Solution


K Solutions Engine Link, an iPhone application that uses Bluetooth


Liberty Mutual Right Track, an OBD-II solution


Nationwide SmartRide, an OBD-II Solution


OctoTelematics is the primary black box of Europe with a lion’s share of the market

(Sierra Wireless is the company’s modem partner http://www.sierrawireless.com/airprime)


Progressive SnapShot, an OBD-II Solution


State Farm Insurance In-Drive, an OBD-II Solution with security and diagnostics


Travelers Intellidrive and OBD-I I Solution, with fleet management & cybersecurity


Edited by Maurice Nagle

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