Experts, veterans and stakeholders from across the industry weigh-in on the impact the Covid-19 pandemic will have on motor insurance and the use of telematics and usage-based insurance products
The world has been thrown into turmoil by the Covid-19 pandemic this year, and home working has become one of the notable changes making up the ‘new normal’. The reduction in driving observed across the industry has led consumers and insurers alike to reevaluate the value of traditional motor insurance policies. Peter Littlejohns investigates why many within the industry believe usage-based insurance will increase as a result.
Alarm clocks sound in the homes of white-collar workers in the same way they did in 2019 – but something is different.
The time reads 8:30am, a sight that would have caused panic last year as the realisation set in that there’s just half an hour to reach the office.
But the workforce is calm. Workers know they have enough time to reach the computer in time for the morning meeting, all the while adhering to the new workplace dress code – a comfy t-shirt with trousers an optional extra.
This is today’s reality for those forced to take their work home with them as the Covid-19 pandemic triggered lockdowns across the world.
But far from a fleeting state of affairs, many believe some degree of home working will remain a permanent fixture when the virus begins to fade into obsolescence.
The nature of risk is changing alongside these working patterns. Home offices have created new endpoints for cyber criminals, occupied homes have decreased the risk of robbery for some – and vehicle owners who continue to drive fewer miles are posing a lower claim risk to insurance companies.
In relation to this latter shift, several experts and stakeholders believe the pandemic has kicked into overdrive a trend that was already gathering a head of steam – usage-based motor insurance.
John Kowalyk, an industry veteran who created a usage-based insurance (UBI) product in the ’90s and now serves as corporate telematic sales director at Trakm8, says the demand for his services has spiked due to Covid-19.
“There are loads of companies now looking to facilitate a usage-based product, and Covid has really highlighted the reasoning and rationale for usage-based insurance,” he says.
“There was a two-month period in which I didn’t use my car at all, and I don’t even use it much now other than for pleasure, because business has changed so dramatically.”
The latest ONS data shows 49% of workers undertook their jobs from home at some point between June 7-14, less than a full week after legal restrictions on going to work were lifted by the government.
“Whether this is going to last one month, three months, six months, one year, or more, nobody knows,” Kowalyk adds.
“But what it has done is made insurtech companies more aware of utilising telematics to develop and run usage-based insurance policies.”
Usage-based motor insurance, past and present
Telematics was a technology originally brought into the commercial insurance space to de-risk younger drivers by making them accountable for their behaviour on the roads.
But before black boxes became a common offer in the marketplace, the concept of usage-based insurance was designed by Kowalyk for a different purpose.
“I was selling motor cars and I had a load of them left, so I needed to find an insurance scheme that would allow me to rent the cars out on a daily basis,” he explains.
“But I couldn’t find an insurer that would give me a daily rate.”
Kowalyk had to grapple with this conundrum in the mid-1990s, when the commercialised and widespread internet we enjoy today was an unrealised concept, and businesses like his own had to rely on “386 and 486” computers – techy shorthand for two Intel processors released in the 1980s.
Given the limitations of computer technology, it’s unsurprising that insurance companies struggled to understand the type of product he wanted to insure his fleet – but he found better luck across the pond.
“I had to go to an American insurer that would provide us with the facility if we could supply a platform that declared when the vehicles went out and then came back,”
“That was formulated in the late ’90s into the early 2000s, and it was the first daily-rate insurance in the marketplace.”
Realising the potential for UBI to disrupt the motor insurance space more widely, Kowalyk developed a concept for using telematics to insure young drivers – an idea that would see its practical expression over the next decades in the many ‘black box’ policies still on the market.
Two of the earliest companies to work with Kowalyk on a UBI proposition, Ingenie and insurethebox, are still going strong.
But since those early years, competition has come from both incumbent composite insurers – those whose activity spans across many different lines – as well as newer players presenting a fresh spin on the concept.
Market penetration and consumer interest
There’s no single source of authority on the degree of market penetration from UBI policies, but one report from management consultancy McKinsey put it at 2% in the UK, compared to 6% in the US, in 2016.
A more recent figure given by online data portal Statista suggests the UK’s penetration rose to 3% in 2018, whereas Italy led the way in Europe at 16%, partly due to a law that mandates insurers to sell telematics policies alongside traditional ones.
An April 2019 paper from insurance-focused data and analytics firm LexisNexis Risk Solutions (LNRS) revealed that, despite this low market penetration, telematics-based policies were reaching a saturation point among their target age group of teenagers.
“The market of 17- to 19-year-old drivers, where telematics has the deepest penetration, is capped at around 1.1 million drivers,” the report said.
“With close to 1 million policies in force today, there is very little room left to grow in this segment.”
Steve Kerrigan, senior vertical market manager for insurance and connected car services at LNRS says his firm’s research found that older consumers were already warming to the idea of usage-based insurance before Covid-19 gave them an extra nudge.
“Before Covid-19, the awareness was already growing, and we’d learned from research that consumers were thinking more about fairness,” he says.
“We found that 78% said a flexible premium based on miles driven and driving style would be their main motivation for taking out a telematics-based policy.
“An additional 53% said keeping track of their miles was the most appealing aspect.”
The need to grow beyond the young driver segment prompted a new player with a new proposition – pay-per-mile insurance.
By Miles hit the road in 2018, about two years after it was founded by CEO James Blackham and CTO Callum Rimmer, with an insurance product costed on the number of miles driven by a policyholder.
The idea wasn’t entirely original to the market, as the first iteration of coverage from insurethebox, released in 2009, was a miles-based product that allowed users to top up their insurance if they neared a limit set at around 6,000 miles, with the possibility to win these extra top-up miles cost-free through risk-averse driving.
But the unique selling point in the By Miles proposition is that driving behaviour isn’t taken into account when policies are costed, meaning while younger drivers can and do save money by paying for just the miles they drive – as well as a flat cost to protect the vehicle when it’s stationary – they aren’t the only category of drivers that can benefit.
This proposition was unique to the UK, with US firm Metromile having launched its own miles-based coverage in late 2013, enjoying enough success by 2016 to acquire AXA subsidiary Mosaic Insurance, giving it control over the underwriting and claims experience of its customers.
It’s unclear yet whether By Miles will emulate this level of success in the UK, but Covid-19 and the resulting lockdown measures it caused could give it a boost, as consumers have become more aware of the drop in value of their policies when their vehicles aren’t in use.
According to a recent announcement, the London-based insurtech saw its sales jump by 75% in July when compared with the number of policies it sold at the beginning of 2020.
In the UK, insurers did little to dissuade their customers from looking elsewhere for motor coverage, with only two offering some form of premium relief.
US insurers took a different approach by cutting premiums by between 10% and 25%, with some running the discount for up to three months from April.
But Metromile vice president of insurance Jesse McKendry says the rebates haven’t stopped customers from assessing pay-per-mile alternatives like that of his own company.
“Pre-Covid, there was a meaningful percentage of the US population that we were very relevant to,” he says.
“With Covid, a lot more people, when presented with the idea, get this understanding that a per-mile insurance policy obviously makes more sense if you happen not to be driving now.”
The challenge, he adds, is cutting through the waves of insurance advertising with Metromile’s message that pay-per-mile can save consumers money.
Will Covid-19 and lockdown measures drive more usage-based insurance into the market?
It remains to be seen whether or not the lack of premium discounts in the UK will push drivers towards a usage-based insurance policy.
Mike Brockman, the industry veteran that worked with Kowalyk back in 2009 to bring insurethebox to market for young drivers, believes the actions of the two providers who did give some degree of premium relief to customers, Admiral and LV=, will be quickly forgotten.
“Will they be remembered because they did [give premium relief]? I have my doubts,” he says.
“People have short memories, so those that didn’t give a discount, in a year’s time, will probably be forgotten about.’
“Where it could come home to roost is when their profits are declared.
“If they’re making huge amounts of underwriting profit, which they undoubtedly will do, there will be another wave of bad PR on the insurance industry.”
For Kowalyk, who spends his working hours trying to convince the insurance market that telematics-enabled policies are the way forward – both for consumers and providers alike – there has been a noticeable shift in how willing the market is to listen.
Talking of current players in the UBI market, like By Miles, he says “You’ve now got others coming fast behind them saying ‘well, if it works, why aren’t we doing it?'”.
He sees this as a natural realisation spreading across all but the largest players, for whom legacy systems and the profit motive behind maintaining annual premiums remain a barrier.
Kowalyk says the line of thought that drives these incumbents is misguided, because insurers have a bigger risk on their books than they think when they’re relying on customers to estimate their total annual mileage.
“They’ve actually got more mileage, which leads to more claims, despite having only collected the premium based on the number of miles the customer proposed,” he says.
“The traditional way of insuring is incorrect. You need to have live data.
“If it were me starting up an insurance company tomorrow, I would not write one policy unless it was telematics based.
“This is the reason I believe, based on the enquiries we’re getting, that a lot more people are looking at UBI in a different way.”
Brockman agrees that Covid-19 has created more awareness to consumers, but argues the pandemic itself won’t allow the industry to break that 3% adoption barrier unless providers are offering more than just a price reduction using their telematics device.
“Covid-19 isn’t necessarily the catalyst of a big change in telematics-based insurance,” he says.
“It has revealed a weakness in conventional policy design, but insurers still have to crack the conundrum of why somebody wants a device in their car, and what they are getting in return.
“Unless you can explain to a customer that is paying a premium between £300 and £400 what the benefit is, it’s never going to happen.”
Brockman’s strategy to implement this extra value centres around his company ThingCo’s telematics device Theo, which he’s hoping will be consumer-friendly in its own right due to its feature-rich proposition, before savings from its insurance partners are taken into account.
But while ThingCo attempts to build up a client base by targeting consumers themselves, as well as brokers – the most recent of which was female entrepreneur Sam White’s Freedom Brokers – the wider market is likely to be influenced by advances in connected car technology.
Advances in connected car technology will shape the future of insurance, including UBI
Connected car technology is a term used to describe the relationship between hardware within a vehicle itself, or an aftermarket device, and software that pulls data related to the operation and health of the vehicle.
Until now, this data hasn’t formed a part of the underwriting framework for insurance companies, but in a recent conversation with NS Insurance, Jeffrey Skelton, LNRS MD for insurance in the UK and Ireland, explained how insurers are gearing up to extract value from connected car data.
LNRS senior vertical market manager Carla Hopkins says the firm will be rolling out this capability soon under the name Vehicle Build, and believes it will be a game-changer for insurers.
“Traditionally, rating factors around things like location and previous claims history have determined what that ultimate premium looks like,” she says.
“But the insurance market is recognising the vehicle can tell them a lot about the risk they’re covering.”
As well as giving insurers visibility over the high cost of replacing technology-enhanced vehicle parts – a leading cause of what the market calls “claims inflation” – the availability of vehicle data to insurers also means they can consider the existence of Advanced Driver Assistance Systems (ADAS) when they assess risk.
“Because the car is interacting with the driver, insurers are now looking to take into account the safety features that are on the vehicle, and plug that into their rating factors,” Hopkins adds.
The benefits of connected car technology like Vehicle Build applies to the entire insurance market, including those not keen on selling more UBI policies.
But Kowalyk believes the benefits of live data from policyholders’ cars can strengthen the proposition of UBI further, making customers more “sticky” to their insurer, and less likely to look elsewhere.
“The next wave of insurer will be using connected car data as the primary for a customer to take their policy over somebody else’s,” he adds.
Using data collected from the car’s components, insurers have visibility over the health of it, and can inform the driver there’s an issue before it can become the source of a claim.
Already a functionality Trakm8’s OBD-II device can enable, Kowalyk says some of the newer insurtech firms are already adding these extra services to their propositions.
Metromile’s McKendry says US insurtech players are assessing the value of vehicle data too, and that his own company is “in discussions” with several analytics providers as well as original equipment manufacturers (OEMs) themselves.
“That’s going to be a developing part of the market for sure,” he adds.