A series of events since the first of the year may offer insurers increased clarity and certainty should they choose to launch usage-based insurance programs. Those programs, also known as insurance telematics, use in-vehicle devices to monitor driving behavior moment-by-moment to rate risk, facilitate underwriting and offer insurance rates based on an individual's actual driving behavior. Insurance industry group ACORD (Association for Cooperative Operations Research and Development) in January published its open data standards for insurance telematics technology. And Progressive Insurance, the leader in the usage-based insurance market and an insurer that has established its own telematics data standards, has endured a series of setbacks in its efforts to delay or deter other insurers from launching usage-based insurance programs.
Insurance telematics presents an attractive opportunity for insurers in that it enables them to offer rates that are actuarially sound, accurate and profitable. Other potential benefits to insurers include attracting greater numbers of safer drivers based on the promise of meaningful discounts, as well as the opportunity to differentiate their products and services in a crowded and increasingly commoditized market. Those value-added products and services could be based on a combination of driving behavioral data, physical location and other characteristics communicated by the vehicle or derived from that data though algorithms. Global growth in telematics subscriptions is expected to increase 81 percent on a compound annual growth rate to 107 million users in 2018, up from 5.5 million at the end of 2013, according to "Usage Based Insurance and Safety Telematics Synergies," from ABI Research, which offers analysis and quantitative forecasting of trends in global connectivity and emerging technologies.
But hurdles include large start-up costs associated with the telematics data collection devices and the communications infrastructure to support the transmission of the driving behavior data, which is exacerbated by the lack of data standards and the resulting challenge of creating custom interfaces from the telematics technology to other insurance administrative systems.
In its report "Technology Overview for Personal P&C Auto Insurance Telematics," research firm Gartner Inc. says just 13 percent of auto insurance carriers have piloted or deployed UBI products and 47 percent are monitoring or evaluating them. "The market for telematics technology, however, is still emerging and consolidating, making it difficult for buyers to select the right path and vendors to support usage- and risk-based insurance products," says Gartner Analyst Kimberly Harris-Ferrante in the report. The lack of a proven model is especially of concern to carriers that may not have the resources to integrate the variety of software and hardware required to implement an insurance telematics program, according to the report.
On the other hand, Progressive Insurance, the undisputed giant in the U.S. insurance telematics space, with more than $2 billion in insurance premiums from its Snapshot UBI program and 10 billion miles of consumer driving data, is essentially offering a competing and proven proprietary standard. Progressive has offered to license its patents to competitors and brought patent infringement suits against Liberty Mutual, Allstate, State Farm and The Hartford, insurers that have launched UBI programs without licensing the patents. In April 2013, the consolidated lawsuit was stayed by the judge while Liberty Mutual began challenging the validity of the Progressive patents, asserting they should be cancelled. (see sidebar: "Go with the Flo?")
"Regarding ACORD standards, regardless of how companies obtain driving data, if they are interested in implementing a usage-based insurance program, we would still require them to license our intellectual property," says Jeff Sibel, Progressive public relations.
In March 2014, as a result of Liberty Mutual's assertion, many of Progressive's patent claims were cancelled. "Assuming the cancellation of Progressive's patent claims is upheld, this should accelerate the adoption of telematics in insurance, since fear of patent infringement has been a reason for some insurers to put off evaluating the potential of telematics more seriously," says Matt Josefowicz, partner and managing director of Novarica, an insurance strategy and technology consulting company.
THE NEW STANDARD
The process of creating open data standards for insurance telematics began in the fall of 2011, says James Bielak, program manager, P&C for ACORD and leader of the insurance telematics working group. "Progressive was the invisible elephant in the room when we were having our working group sessions," Bielak says. "They never attended; they didn't have to. They were the first to the game and they have their own device." Bielak says the sessions, which were open to ACORD members, were frequently slow moving, as insurers were reluctant to share information or ask specific questions. Some of that reluctance may be attributed to the fear of litigation from Progressive, Bielak says, as well as participants' concern that they would reveal their UBI plans and strategies to competitors, and the foreignness of the subject matter.
"If you do a 'telematics device' search on Google now, you'll have pages of different devices that install in different parts of a vehicle and collect different types of information," Bielak says. "Every telematics device has its own data format. But insurers consuming this data are not interested in becoming experts in every device. They'd prefer to receive a standard ACORD message, like they do for personal auto quotes and claims reports. It's a way of saving money and becoming more efficient."
Telematics data is not insurance data, Bielak explains. "This is telemetry and scientific time-series data; second-by-second observations," across a range of data points, including speed, acceleration, direction, altitude, brake pressure, positioning and day, date and time, for example. "It's new for insurance people," Bielak says. And, because it is time-series data, there is a super abundance of it. Imagine getting a spreadsheet with 25 elements describing the way a vehicle is driven; and then getting one for each second it is driven, he explains. The resulting volumes of data essentially require companies offering UBI programs to create big data environments, thus adding an additional layer of complexity to the project for many insurers.
"We have to tell you the vehicle identification number (VIN) as detected by the device and the VIN number the TSP [telematics service provider] has the driver enrolled under, which could be different [in the case of fraud]. We have the ability to communicate drivers' IDs, too. Some of these devices can detect driving styles by individuals and other value-added things," such as threshold reporting of events, he says. "Based on the carriers' criteria, TSPs can go through that data and say, 'consider these 10 hard-braking events, a couple hard-cornering events and some suspicious acceleration,'" Bielak explains.
"We were quite successful in staying away from how to use the data and instead focusing on what the data consists of, and how logically to organize and send it in a transaction," Bielak says. "[The standard] doesn't tell you how many Gs [gravitational forces] are in a hard-braking, hard-turning or hard-acceleration event. We identify that Gs, acceleration data, are important to communicate and where to find it in the data."
Using the standard ACORD format, driving events have common names, and once insurers receive the data, they can filter and use it any way they want and create their own definitions of a hard-braking event, for example, he explains. "The whole point is to make it intelligible to insurers across these various platforms," Bielak says. When dealing with multiple different devices, for example, one may not report a specific piece of data, such as GPS data. Those fields would be empty, Bielak says. "But under the ACORD standard, the GPS columns would be in the same place as everybody else' and that allows us to create one interface that conforms to all the different data that is coming in."
Other events, such as collisions, could prompt real-time transmissions and initiate contact from the insurer to the insured, for example, while most other events need not be communicated in real-time and the frequency of communication could be determined by insurers and their technology partners. "The TSP bundles it up and sends it to the carrier. That's a pretty nice packet. You have the stream data and you have the events pulled out," Bielak says.
Vendors also would benefit from the adoption of data standards, Bielak says, adding that customized data standards are unlikely to earn favor among insurers, as they tend to be conservative. "They're already dealing with your competitors," Bielak says. Instead of focusing on the complicated, unique one-off interfaces, and by accepting and implementing the ACORD standards, vendors would free up resources to offer better services and data while reducing everybody's costs, he says, which he knows from past experiences.
In 2002 ACORD approached the company Bielak then worked for, Examination Management Services, which offers underwriting solutions to insurance carriers, and its three competitors to help create an underwriting data standard. Initially, all were reticent, he says, concerned that data standards would leave them as interchangeable, commoditized technology providers. "It turns out that it was a really good thing for us because we had more than 1,200 different interfaces for different companies and different purposes. Our IT department, for the maintenance, was as big as the rest of the company. Once we went with the ACORD standard, we reduced headcount and were so much more efficient it wasn't even funny," Bielak says.
The ACORD standard will be updated this summer to include country codes and driving scores, akin to credit scores, which could be based on proprietary algorithms and used for rating, Bielak says. Much like FICO scores, the scores would be proprietary and contextual, but standardized in their format and location among the telematics data. "Any kind of behavior you can come up with, you could devise a score for that behavior," Bielak says. "There's a driving behavior score, there's a fuel efficiency score, a 'green score,' braking score, a corning score."
Standards for fleets and commercial vehicles could follow. "Our standard conveys information about a car. If you have a fleet of 100 cars, we can enable that. When you get into the commercial realm, there are a lot things to be considered, but we created a base model that's applicable anywhere and everywhere. Now we can begin to specialize."
The ACORD standards, which have yet to be implemented by an insurer, could make it safer for insurers to enter the UBI market and easier to plan for technology and expenditures because even as their needs change over time, the standards would enable insurers to reuse components and interfaces, reducing costs, Bielak says.
"Vendors come and go. In the early 1900s, there were 1,800 automakers in the United States alone," Bielak says. "We ended up with the Big Three. If you are a consumer of this technology, you have to pick somebody. Hopefully that company uses a standard so that if you have to change in midstream, you don't have to scrap all the previous development. This stuff is important. Insurance companies are our members. We are doing this for them."
GO WITH THE FLO?
In late March, Progressive Insurance, the largest player in the usage-based insurance market, announced that it has collected more than 10 billion miles worth of driving data in its Snapshot program since it was launched in January 2008. The program accounted for $2 billion in written premium in 2013, Progressive said, and more than two million vehicles have participated in the program. One-third of Progressive's direct customers are signing up for Snapshot, says Dave Pratt, general manager, UBI at Progressive, and consumer adoption will continue to increase, he says, as advertising increases awareness among consumers.
"We don't think the [ACORD] standards will affect Progressive much at all because, as the innovator in usage-based insurance, we built all of our systems from scratch," Pratt says. "We've already got systems that work well and collect that data, so we are not that concerned about standards."
While dominant in the UBI space, Progressive recently has been less than successful in asserting its patent claims, enduring a string of cancellations of the company's patent claims. Progressive filed suit against Safeco Insurance, a Liberty Mutual company, on June 18, 2010, alleging patent infringement. And, in January 2011, filed a second suit against the company regarding additional patent claims and another against Allstate. Suits against State Farm Mutual Auto Insurance and Hartford Fire Insurance were filed on April 30, 2012. The suits were later consolidated. Allstate reached a settlement with Progressive in October 2011, but did not disclose the terms.
In December 2012, Progressive announced it would license its UBI intellectual property, essentially offering immunity from lawsuits to insurers that would enter the agreement. "We have been developing and refining our industry-leading UBI program for more than 15 years and have been awarded six patents for good reason," said Glenn Renwick, Progressive's president and CEO in the announcement. "We invite other companies to license our intellectual property. In the meantime, we will continue to defend our patent-protected technology rights."
The United Services Automobile Association (USAA) agreed to Progressive's terms in June 2013: that the agreement was executed through April 2022; that USAA would not rate insurance based on customers' driving habits before April, 2015; and that it would pay a licensing fee equal to two basis points (0.02 percent) on USAA's countrywide private passenger auto insurance direct written premiums for the most recently reported year. Liberty Mutual took another approach.
In April 2013, the consolidated lawsuit was stayed - halted by the judge - until the validty of the patents is determined, leaving the insurers able to proceed with UBI programs. Liberty Mutual has challenged the patents' validity, asserting they should be cancelled as per the "covered business method" proceeding, which was enabled by the America Invents Act. Liberty Mutual has so far prevailed in having claims cancelled from the five patents Progressive has accused the companies of infringing.
"While we're disappointed in the rulings by the Patent Trial and Appeal Board (PTAB), these decisions were not entirely unexpected given the rules for conducting the proceedings and the end results patent owners have received thus far," Progressive spokesperson Jeff Sibel says. "The rulings issued are just one step in the process and we'll continue to defend our intellectual property through all of the available channels," he says. "Our patents and the license agreements we have in place remain viable and enforceable until all of our appeals are exhausted."
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