It's a logical concept: Where, when and how people drive their cars affects whether or not they're likely to have an accident. But the insurance industry is just beginning to determine how driving behavior correlates with risk.

Leading the pack on what's known as "usage-based" insurance premiums is Progressive Casualty Insurance Co., Mayfield Village, Ohio.

The $11 billion property/casualty carrier holds two U.S. patents for its method of determining the cost of auto insurance using vehicle usage data. In addition, the company has launched two pilot studies-one in Texas in 1998 and another in Minnesota this summer-to study the concept's feasibility.

In the current study, 5,000 Minnesota drivers will plug a matchbox-sized electronic device into the onboard diagnostics (ODBII) port of their cars to receive discounts on their insurance premiums. The device, developed by Davis Instruments Corp., Hayward, Calif., records the car's speed and time it's in use, which Progressive will use to evaluate risk associated with how much, how fast, and when a vehicle is driven.

Initial pilot in Houston

The company's initial pilot, which took place in Houston six years ago, successfully lowered participants' insurance premiums by 25%. But the telematics device the company used at that time had to be retrofitted into policyholders' cars. Plus, it incorporated global positioning satellite (GPS) and cellular technologies, which made the device too costly and complex to produce and install in vehicles on a large scale.

"When we introduced usage-based rating that leveraged GPS and cellular technologies, we knew we were ahead of our time in this country," according to Mark Connelly, online marketing manager at Progressive."

Connelly made that statement two years ago-when Progressive granted exclusive rights to its patented method of determining auto insurance premiums to U.K.-based Norwich Union. Norwich Union is now running a "Pay As You Drive" pilot in Europe (see below).

Because telematics devices have not yet been installed in cars on a wide scale, Progressive's current study employs a much simpler device, called a "TripSensor," which plugs into the ODBII port in newer vehicles (1996 and later) and does not use cellular or GPS technologies.

Unlike telematics, the ODBII port has become ubiquitous in the market-because the U.S. Environmental Protection Agency mandated its installation in new vehicles for emissions testing and monitoring purposes, notes Dave Huber, Progressive's TripSense project manager.

The ODBII port communicates with the majority of electrical components in a car. Therefore, Progressive realized the port could be used to capture data that was relevant to usage-based insurance.

For the time being, the company has decided to forego collecting data on where policyholders were driving, eliminating the need for GPS tracking, as well as automatic uploading the data, which requires cellular technology. Instead, Progressive is homing in on when and how participants drive their vehicles.

As a result, Minnesota drivers involved in the pilot will be able to install and remove the TripSensor themselves, then download the data onto their own PCs to evaluate their usage data and discounts with software provided at

If participants choose, they can then upload their vehicle usage data to Progressive via the Internet to receive an additional discount. Both the TripSensor and the software are free to study participants.

New customers in the program receive a 5% discount on their current policy. And in subsequent policy periods, they'll receive a 5% discount if they share their driving data with Progressive.

Participants also may qualify for a "usage discount" of up to 15% based on how much and when their vehicle was driven. An additional 5% may be added or subtracted from the usage discount depending on the percent of time the vehicle was driven slower than 75 mph.

Intriguing features

"An intriguing feature of usage-based insurance is that it gives customers some control over the amount of money they pay for insurance-and that is very appealing," Huber says.

Progressive's program also is voluntary. "We're also capitalizing on a very important brand attribute-and that is choice," he adds. "As we make TripSense available, customers always have the choice to participate. They also have the choice of sharing their data with us."

Progressive is running the pilot only in Minnesota to minimize the company's exposure and contain the study, according to Huber.

"We chose Minnesota because we've had success with first-time initiatives in that state," he says. For example, in 1997, Minnesota was the first state in which Progressive offered consumers the choice of purchasing auto policies over the Internet.

The program also is limited to the online channel. "We had a limited IT investment," Huber says. "We can make this product available more quickly and inexpensively if we make it available exclusively on the Internet."

That's because integration with the company's back-end systems is much more straightforward using Internet-only distribution. "We're excited about the idea of implementing usage-based insurance, but we have to collect data, make changes to the rating algorithm, and print a declaration page," Huber says. "Using the Internet has enabled us to do that fairly quickly."

In addition, the company wanted to control the offer and its presentation. With a single page on a Web site, Progressive can make changes to the program more quickly, such as modifying the discount, revising the description, or removing the offer completely if necessary, he explains.

Training and support costs for agents and call center reps are also minimized by offering the program online.

"Obviously, the independent agent channel is important and the largest channel," says Huber. "But since this is a pilot and we're not sure what the results will be, we were hesitant to offer it through other channels at this time."

The current pilot will run for at least 18 months-enough time for Progressive to evaluate its effect on conversion rates. But the company fully expects usage-based discounts to become a permanent offering in Minnesota-and hopefully in other states as well.

"In the 1998 Houston pilot, we learned about how consumers reacted to the concept, how the technology worked, and we gathered data about usage, which we have interpreted and applied," says Connelly. "But there's still a lot to learn before we'll be able to apply it more broadly some day."

Euopean Pay-As-You-Drive Program Stalls

U.K.-based Norwich Union announced its "Pay As You Drive" program in February 2002, shortly after the company received exclusive rights to U.S.-based Progressive Casualty Insurance Co.'s patented method of determining auto rates based on when, where and how a person drives.

With a team of approximately 100 people from Norwich Union and its vendor companies developing the telematic devices, the infrastructure, and the interfaces to Norwich's back-end systems, the company had expected its pilot program to begin last summer.

But launch was delayed to this summer. "Things have taken a bit longer than anticipated. But that's the nature of an R&D project," says Robert Ledger, program director at Norwich Union, which is part of London-based Aviva.

Still, progress has been made. Over the past 12 months, the company has installed approximately 500 data-collection devices in the cars of its employees, as well as some customer vehicles. And currently, Norwich Union is fitting several hundred "black boxes" per week in customers' cars.

"By the end of this year, we expect to have 5,000 customers with boxes installed in their vehicles," Ledger says.


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