Interview: Why Insurance Regulators Must Adapt to Telematics and Drones
In the second part of this exclusive interview, Alyssa Pei, partner at A.T. Kearney, discusses emerging technology, privacy and regulatory concerns, as well as the gaps between insurers, regulators and consumers. For part 1 of this interview, in which Pei discusses insurance regulatory issues around third-party data, click here.
INN: If I'm the CEO of a P&C insurer, and I'm looking at IoT technology, what are my regulatory concerns with regards to partnering with an alarm service or putting in a smart thermostat, moisture detecting sensors or what amounts to surveillance cameras and equipment?
AP: Today there are no bars on any given insurer's participation in that conversation or even offering those services. I think that they are watching cautiously to make sure that no unnecessary barriers come down in that space. They want that information. For them it's more a concern that consumers react to privacy concerns; after all, this is your house. If regulation comes down that limits what information can be shared out of these devices? That's something insurers would like to guard against, but they don't have any barriers right now, except whether or not they can price on it.
INN: Let's talk about the sharing economy, which insurers are only beginning to address. For example, in January an Uber driver hit and killed somebody and there was debate as to whether this was Uber's responsibility, from an insurance standpoint, or the driver's, given that there was not an Uber passenger in the car. What are the regulatory issues with regards to the sharing economy?
AP: It's still about product coverage and the assignment of liability. Many of the carriers are saying: "We do not cover," and are being forced to clarify that, in fact, use of your personal vehicle for Uber is a business use and is therefore, in most policy language, excluded from your existing coverage. Now insurers are solving for products that fill that gap.
When there is no driver, that's stymied the California legislature from full bar approving the use of autonomous vehicles. They can't and haven't wrapped their heads around what safety standards should look like for autonomous vehicles, and how the assignment of liability runs. There are lots of different scenarios but, if it's a fully autonomous vehicle, essentially what it comes down to in the case of vehicle-caused accidents is an error in the operating system. That's not even personal insurance anymore. The Google cars don't even have steering wheels. If you can't steer it, how much liability can you have? It's not a user error anymore. The environment is very much set up, on the personal line side, on user error and fault both from legal/litigation landscape perspective, which then informs the regulatory landscape.
INN: Are regulators keeping pace with drones?
AP: State Farm, USAA and American Family, they've all filed petitions with the FAA to use drones. The technology, video resolution and the amount of information you can obtain is outstanding and more consistent when obtained through a drone. The case, and the argument, was very much around speed of resolution, accuracy of outcome, and better overall experience for the consumer on the claims management side. You can also pretty rapidly see them having better information on the underwriting side when assessing. Commercial carriers that do crop and agricultural insurance, as an example, it's very easy to get quality, terrain and all of those factors that go into thinking about agricultural loss with this type of equipment. It becomes an input that is better quality, faster, and pretty valuable from an underwriting standpoint as well.
INN: What were the regulatory concerns addressed by the FAA resolution, or by the insurers’ requests for relief?
AP: The FAA is looking at this from a protection of airspace and norms of operating in airspace perspective. That's why they wanted everybody to be licensed. For them, this is about insuring the protection of the skies. From that standpoint, it was about not having unmanned aerial collisions, or collisions with planes or unanticipated consequences. They have a point of view and a say on who gets to fly things close to buildings. That's the guiding philosophy coming out of the FAA. What carriers and other commercial applications have said, is essentially that they are no threat to any of those concerns, and there are valid business reasons for undertaking this.
INN: Are insurers happy with these results?
AP: Just as there are carriers who have stepped into the gap on the sharing economy, there are carriers who have stepped into the gap for drones, both from an operating and a liability perspective. Since most of the market for insuring drones is for a commercial purpose, it's really the specialty carriers who have created the products to cover those fleets. And then there will be an opportunity for personal lines carriers to offer coverage in much the same way that they do your RV or your motorcycle or your jet ski. I suppose we could all envision a future where they're offering you protection on your drone.
INN: How are start-ups and new economy leaders viewing insurance companies based on insurers adaptation to the shared economy and drones and driverless cars? What's your presumption? What are you hearing?
AP: What I hear is that they are viewing insurers with growing interest and pretty rapidly growing interest. If you went back maybe two years ago -- anecdotally I know this from clients of mine who have gone to these conferences -- I had clients who would go to Consumer Electronics Show. They would talk to the start-ups and the well-established home electronics providers and everybody was a little surprised to see them. They couldn't quite figure out why insurers were there.
In large part, that had to do with the fact that the insurance industry isn't known as being innovative and fast moving. But as telematics has come to the national markets’ attention, which has really only happened in last two years, and as advanced safety systems in cars become more commonplace and more broadly advertised, the start-ups, and MetroMile and Automatic are two great examples, have realized that insurers have deep pockets, are looking for ways to be more relevant to their consumer base, and stand to gain financially if they can prevent claims.
INN: What is Automatic?
AP: Automatic is another start-up out of San Francisco. I see them as the potential Experian of the driving experience. It’s a telematics device. You plug it into your OBD2 port, and it tells you how you're driving. But it's not linked to any insurer. It’s like a Fit Bit for your car. You can create a network of friends and compete with each other for best mileage or whatever. It gives you a driving score, and you can track your progress. What they are doing is they are creating portability in driving behavior. If I'm allowing Automatic to provide my last six months’ driving experience, and I'm consistently an “87,” picking a random number out of a hat, I'm a pretty good risk. They might want to offer me some incentive, some particular coverages, based on who I am. But they don't own that score. I, as the consumer, own that score.
INN: So it would be incumbent upon the insurer to do rating based on that 87 or to accommodate that 87 in their rating formula.
AP: Right. Just as I could go and say I'm a FICO of 720 and who's going to give me the best APR.
INN: I know that with Google they are self-insuring their self-driving cars. They've got $5 million of coverage on each of those vehicles. Do you think that these technology companies are going to circumvent traditional insurers by self-insuring or forming associations? Do they have hopes that insurers are going to catch up?
AP: Well, I think that's a very real possibility. I would say that I don't see them going full boat, but I see as a potential threat to insurers is these companies carving off pieces of risk profile and saying, "We'll protect you or we'll cover you if X happens. But we won't cover you for the rest of it." I think, shifting back to the home, there are water-sensor providers who say, "Install this and we'll cover you for the first $10,000 worth of damage." So they're shaving off portions of the overall risk profile that an insurer traditionally covers.
INN: What regulatory concerns might Google Compare have in the United States? It seems like that was a long time coming.
AP: This is less Google; this is aggregators in general. The aggregator model is very effective and efficient in certain markets, but less so in this market. Part of that has to do with the strength of the consumer brand. In this country, State Farm is still the lion's share leader, and they spend a lot of money on marketing their individual brands, which is not true in markets where aggregators tend to be more dominant. This is less a technology and regulatory question and much more a market dynamic and behavioral question. But the 50-states thing’ doesn't help. On that front, it's a regulatory issue, but that goes back to my observations on the lack of a federal model. I'm neither for nor against one, but it creates certain operational barriers.
INN: While it would certainly make it easier for insurers to have a single set of regulatory concerns, insurers don’t seem inclined to give the federal government any more authority. They’re pretty eagerly opposing that in the Consumer Federation.
AP: Yeah, and if you look at who the incumbents are in the United States, they are all domestic carriers. It creates a significant barrier to global entrance. It is in their best interest, if you're State Farm or Allstate or whomever, to run with the system that you've already embedded and paid the cost for, rather than lower the barrier.