Using Global Positioning Satellite (GPS) and cellular communications technology to gather information about when and where a motorist is driving, United Kingdom-based insurer Norwich Union is launching a pilot study this summer that could play a role in transforming the way auto insurers underwrite policies.Called "Pay As You Drive," the two-year study will involve retrofitting the cars of 5,000 Norwich Union policyholders with a "black box" that will gather and transmit vehicle and driving data to the insurer's back-end systems. Norwich Union statisticians will then analyze the data to determine which variables affect risk and claims, and those results will be used to calculate usage-based premiums.
"We'll be gathering a huge amount of information about when and where our customers are using their vehicles," says Robert Ledger, program director at Norwich Union, a unit of London-based Aviva.
The program "is really about relating that information about usage to claims information," he says. "As we start to build a picture, it will show if a customer uses their car in this sort of way, this is the sort of risk it is, and this is how much it will cost for their insurance premium."
Norwich Union announced its "Pay As You Drive" program in February 2002 shortly after the company signed a deal for exclusive rights to U.S.-based Progressive Casualty Insurance Co.'s patented method of determining real-time auto insurance rates using data about when, where and how much a vehicle is driven.
The Mayfield Village, Ohio-based insurer conducted a similar pilot study in Texas between 1998 and 2001 to determine if this kind of technology, called "telematics," could be used to gather information to calculate a usage-based rating system, and to see if customers liked the concept.
According to Progressive, the technology proved feasible and consumers liked the pricing system because it gave them more control over their auto insurance costs.
In Houston, for example, Progressive customers who signed up for the usage-based insurance saved an average of 25% in their premiums compared with the price they paid before the study, the company claims.
The problem was: Auto manufacturers didn't install the telematics technology quickly enough into their cars. "When we introduced usage-based rating that leveraged GPS and cellular technology, we knew we were ahead of our time in this country," said Progressive business development manager Mark Connelly last year when Progressive and Norwich Union signed their agreement.
"We were aware that more vehicle manufacturers were considering telematics, and we had hoped such devices would have been installed in more U.S. vehicles by now," he said.
This year, 14.3% of all cars sold in the United States will have telematics systems installed, according to the Telematics Research Group Inc., Minnetonka, Minn. By 2007, that number will grow to 37.1%. And by 2010, 73.3% of all cars sold in the United States will be equipped with the technology.
"Once a vehicle has telematics devices installed, there are many possibilities of additional time- and money-saving services that can be offered to consumers, including usage-based auto insurance," Connelly added.
Indeed, some of the other uses for the technology include the already-available on-board navigation systems, as well as remote diagnostics, automatic collision notification, and crash event data recorders-similar to "black boxes" in airplanes.
A fairer way to pay
Because telematics is not yet widely available in cars, Progressive is not using its system and does not currently offer usage-based premiums. But the company received two patents for the method it developed for determining the cost of auto insurance with vehicle usage data.
"People say that Progressive was ahead of its time, but I don't think so," says Bill Pieroni, general manager of the global insurance industry business at Armonk, N.Y.-based IBM Corp.
"Progressive was innovative," he says. "And more importantly, the company developed patents to lock out their competitors-so when this technology does become ubiquitous, they will be well-positioned to take advantage of it."
Norwich Union is the European leader in developing and proving the concept of usage-based pricing.
"Telematics will inevitably have an impact on the insurance industry in some way, shape or form," says Ledger. "So as an insurer, you have a choice: You can sit on the fence and let someone else take the lead, or you can be in the forefront. We chose to be in the forefront," he says.
"This is a learning-by-doing exercise. It's not a trivial thing to change how you underwrite insurance," says IBM's Pieroni.
IBM, which announced its telematics capabilities in 1997, was selected by Norwich Union to design and manufacture the "black box" that will be installed in customers' cars, as well as the information gateway that will process the data before it is transmitted to the insurer's database.
Norwich Union also selected Orange, a popular U.K. mobile communications company, to supply the secure telecommunications infrastructure for "Pay As You Drive" program.
With a team of approximately 100 people from Norwich Union and its vendors developing the devices, the infrastructure, and the interfaces to Norwich's back-end systems, the company expects the study to begin as scheduled late this summer.
Already, however, "Pay As You Drive" has received a lot of publicity in the U.K., says Ledger. Nearly 10,000 people have called the company to volunteer to participate in the study-and the majority are not even Norwich Union customers, he says. "People really hook on to the fact that this is a fairer way to pay for their insurance."
"From an underwriting perspective, usage-based rating more closely matches the risk of exposure of the insured to the actual price paid, and eliminates averaging," says IBM's Pieroni. "Over time, you can imagine .the smoothing of premiums-and cost-subsidization will essentially vanish."
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