New Pay How You Drive product in the UK

A new PAYD product went live recently. The website is payhowyoudrive.co.uk.

The pricing is based on how you drive as opposed to how far you drive. They are targeting people who struggle to find car insurance otherwise, and younger drivers.

A few comments after having only spent a few minutes on the site:

• The car insurance product incentivizes safe driving behaviour, which is good.
• The driving is scored using a points based system.
• You can lose your car insurance policy, much like losing your license on the Australian demerit point system if you get to 12 points. Not sure how that works legally, but the contract probably has safe driving as an underwriting condition.
• Points drop off after time, again similar to the Australian driving license demerit point system.
• You buy miles in mileage bands, by agreeing to maximum mileage. That means you declare up front how much you’re going to drive, and then get penalty points if you do more than that. I assume you pay more for higher mileage bands. The mileage bands available are 3,000, 5,000, 7,500, 10,000 and 13,000 miles.
• You get penalty points for fast driving, going over your stated mileage band, and driving too much at night (more than 10% of your mileage band).
• Quite amusingly, if you get to 12+ points you have 7 days to “appeal” against your policy being taken away. Would love to see how that fits into the British arbitration system!

What is good about the product:

• It links insurance cost to driving behaviour, which should improve how people drive.
• People can get feedback on the site on their historical behaviour.

What can be better:

• The product is still quite complicated. I am not sure how it can be made simpler, but it is not all that easy to understand.
• The penalty points are for a small set of behaviours only.
• It is not explicitly linked to mileage driven, but rather implicitly through the bands.
• The telemetry device needs to be installed, and collects location data.

All in all, it is good to see another Pay As You Drive product go live, and we wish them well!

Advertising Pay As You Drive

Pay As You Drive is a great car insurance product. And we’re very biased, I know, but it saves serious money on car insurance for people who drive less than average, and fairly so. At Real Insurance we have had hundreds of thousands of people getting car insurance quotes from us over the last year since we launched. Also, if I look at people talking about PAYD on discussion forums, then it is clear that people “get it”. They understand why the product is a fairer way of doing car insurance, and that is why they call us for car insurance quotes.

An interesting challenge that we have had to solve is how do we advertise the product? How do you explain that this is better car insurance for some people, and that they should call us to get a car insurance quote from us? How do you do that in 30 seconds?

Our latest ads use a device of showing one car driving a lot, and another car driving very little (and sitting in the garage for most of the time). The premise being that if you drive less, you have less chance of being in an accident, and therefore your car insurance quote should be less than for traditional car insurance. I think it is pretty effective. It amazes me to see how much our marketing team can get into a 30 second car insurance TV ad. A version of our latest ad is below. Please let us know what you think by commenting below!

New proposed Pay As You Drive Regulations in California

The Commissioner of Insurance in California has put out a second round of regulations around Pay As You Drive car insurance in California for comment. The regulations are pretty good, and allow for a wide range of designs of car insurance products using mileage as a rating factor.

Some highlights:

1. The regulations allow for the product design that we have in Australia. We’re quite flattered by that! It is good to know we could serve as an example for California!
2. The regulations allow for a wide range of ways in which to monitor mileage, including telemetry (tracking devices). The devices are NOT allowed to track location though.
3. The regulations stop short of mandating insurance companies to HAVE to provide PAYD. This will no doubt disappoint some of the strong advocacy groups. The Multiple Prisoner’s Dilemma will make uptake slow, regardless of the regulations.

The one aspect of this that I still don’t understand is the vehement objections that are made against privacy violations. The regulations prevent location tracking, which I understand, and which I think protects both the consumer and the insurance company.

There are however people who object against driving behaviour being captured. Why would that be? Can someone enlighten me? Why would we as a society not want to know who drives irresponsibly, and why should the rest of us be paying extra insurance for people who drive like hoons?

In one of the responses to the regulations, Andrew J. Blumberg (Stanford), Lee Tien and Peter Eckersley, says the following:

“We believe that it makes no sense to permit the use of any “technological device” without making clear what it does or does not collect. It is our understanding that commercially available devices gather significant information about driving behavior, such as braking, swerving and acceleration. We fear that the “innovation” and “attendant benefits” of a verified actual mileage program lie not in greater accuracy in verifying annual miles driven but in the collection and exploitation of information that does not relate to actual mileage. This fear is amplified by the fact that insurers may use “[i]nformation collected by a technological device” to “calculate automobile insurance rates,” which is entirely different from verifying actual mileage. Mileage verification should not be used as a subterfuge for collecting other information about drivers. Furthermore, the text does not specify adequately controls on the use and dissemination of the information collected. To this end, we recommend the following specific changes to the proposed regulations:

The technological device will be used only to collect the verified actual mileage, and no other information. In particular, it will neither collect nor store nor transmit information about the position, velocity, or acceleration of the vehicle.”
Original link here.

Why should we be sensitive about that?

For interest, the actual regulations have the following three product descriptions in them:
1. Time Basis Policy. All coverages are offered for a set time period. If the block of miles purchased by the insured expires and the insured does not purchase additional miles, all coverages will continue to the end date of the policy. However, this does not relieve the insured from any obligation under the terms of the policy to pay for miles driven in excess of the purchased block. The price per mile for miles purchased after expiration of the mileage block may be greater than the price per mile for miles purchased before expiration of the mileage block, if the insurer establishes an actuarial basis for such differential pricing and the Commissioner approves the differential pricing in the insurer’s rate or class plan application.

2. Hybrid Time Basis and Miles Basis Policy, with notice of expiration provided at time of policy purchase. Automobile liability coverage is offered for a set time period. If the block of miles purchased by the insured expires and the insured does not purchase additional miles, all coverages other than automobile liability coverage will expire, provided the insurer gives notice pursuant to California Insurance Code Section 663. An insurer may comply with the notice requirements of California Insurance Code Section 663 if it gives notice to the insured at the time of purchase of the policy that specified coverages other than automobile liability coverage will expire upon exhaustion of the purchased miles. Such notice shall be effective only if the insured agrees in writing at the time of purchase of the policy to the terms of the notice and acknowledges his or her understanding of the consequences of exceeding the purchased miles.

3. Hybrid Time Basis and Miles Basis Policy, with notice of expiration provided at time the insurer determines that purchased miles have been exhausted. Automobile liability coverage is offered for a set time period. If the block of miles purchased by the insured expires and the insured does not purchase additional miles, all coverages other than automobile liability coverage will expire, provided the insurer gives notice pursuant to California Insurance Code Section 663. An insurer may comply with the notice requirements of California Insurance Code Section 663 if it gives notice to the insured at the time the insurer determines that the purchased miles have been exhausted. The coverages subject to expiration will expire 30 days following the insurer’s notice (in the case of nonrenewal) and 20 days following the insurer’s notice (in the case of an offer of renewal), unless the insured purchases more miles.

Insurance and innovation

An article recently compared a BusinessWeek innovation list with innovation in insurance (see the article below). The writer, Chad Mitchell, makes the case that there are innovation in motor insurance in particular, it is just not noticed, and that more innovation will follow.

I agree with Chad. It is frustrating that insurance innovation is not noticed. It is even more frustrating in Australia than it is in the US. In fact, at Real we have two the three innovations Chad mentions in his article. We launched the world’s first trust-based Pay As You Drive car insurance, and Australia’s first Pay As You Drive car insurance. Our products have highly customisable cover, and you can optimise your premium to what suits you (within a framework of course).

If there are any notable innovations in the insurance space, particularly the personal lines insurance space, please comment on this posting, and let us know what you think!

Insurance and Innovation: An Oxymoron?

By Chad Mitchell July 8, 2009

Awhile back I wrote about the evolution of social media strategy for insurers. The premise of the blog was how insurers effectively use social media to improve customer service and help agents.

The topic of social media is a microcosm of a bigger question I commonly receive from insurance executives: Can insurers and other financial services firms innovate?

Innovation within insurance is stifled because of the extremely challenging regulatory environment. Individual state legislation, product restrictions and widely varying consumer regulations often deter insurers from investing in new products, pricing, promotions and services.

There is proof, for the naysayers, that innovation remains a myth for insurers and financial services providers. Business Week annually ranks the Top 50 Most Innovative companies around the world. Not a single insurer or financial services firm appears in the ranking (except for Citigroup). I don’t believe the report card tells the entire story though. Yes, insurers may never offer the next iPhone or Dyson vacuum, but the track record for innovation is growing.

Just look at a few examples of innovation from insurers over the past few years:

• Telematics and pay-as-you-drive insurance. Progressive leads the pack offering an array of innovative products and services. The firm uses telematics to offer customers a novel concept— a car insurance policy based on how well and how much you drive. Progressive’s MyRate pay-as-you-drive product is a behavior-based car insurance policy that lets drivers lower their premiums based on how they drive. Drivers receive a small wireless device that plugs into a port in their car and measures how, how much and when the car is being driven. Cars driven less often, in less risky ways and at less risky times of day can receive a lower premium.

• Price comparisons and “name your price” solutions. Priceline.com built the business model for name-your-price travel. And Progressive seized the opportunity to innovate within insurance. Progressive currently promotes its Name Your Price service that allows customers to set a budget for auto insurance. Then Progressive builds an auto policy to fit the customer’s needs and wallet. Progressive and Esurance also innovate by offering customers competitive price comparisons at their Web sites. A customer can see a Progressive or Esurance quote along with two to four competitors’ prices. This creates transparency for customers who are seeking the best coverage and lowest possible price.

• Mobile applications and the iPhone. Apple topped Business Weeks’ list as the most innovative company in the world. The company continues to dominate the MP3 market with the iPod, and is making waves in the mobile category with the iPhone. The iPhone is only used buy a small portion of mobile U.S. customers (around 5%), but the penetration of smart phones continues to grow exponentially. Nationwide jumped on this growing segment, and was the first U.S. auto insurer to develop a claims application for a smart phone. The firm released its new iPhone application, available to Nationwide and non-Nationwide customers, that lets policyholders file a claim, take pictures of accidents and manage the claim process through an iPhone application.

These examples may not grab headlines or put any insurers in Business Week’s most innovative ranking, but I believe innovation is happening right now. I speak every week with leading insurers who are evaluating amazing new innovations.

Most innovations are related to integrated online experiences that give customers the opportunity to build a personal risk and financial inventory. Customers will soon have online, mobile and social applications with rich tools, calculators, real-time pricing and online advice software to help them optimize their insurance and investment portfolios.

These integrated experiences will incorporate budgeting, banking and payment solutions normally found through traditional retail banks or investment brokerages.

Human resources and hiring trends are also improving the odds for innovation within insurance. Insurers are hiring senior IT, eBusiness, marketing and product executives from outside the industry. This hiring trend brings new talent to traditionally conservative insurers and executives with proven innovation performance.

We will continue to see major strides in innovation in the next year as insurers deliver more customized products and services to policyholders. Innovation and insurance is no longer an oxymoron.

Original article here.

Some more Australian Press Coverage

Since we launched Real Insurance Pay As You Drive® in Australia, we have had more good press in the US than in Australia. We are apparently known as “that Australian company”, and (somewhat insultingly…) I have been asked many times why our innovation happened in Australia first (as opposed to in the US). We believe we’re a world first. So we are quite glad when we get some attention in Australia.

Jordan Chong wrote an article for AAP recently, which was published (without any vetting from us beforehand) quite far and wide in our terms. The article is included in the post below. Or you can view an example of the article online on this link.

Mr. Chong helped to generate some more publicity around PAYD – and that is a good thing. However, we did not see the article before it was published. This means there are some comments in the article that are not exactly right, so for good measure, you should note that:

1. None of the comments in the article were actually made by or for the Institute of Actuaries of Australia (Institute). Instead, the comments were made by Colin Priest in the context of an earlier presentation he made to the Institute. .

2. You can buy any number of kilometers on Real’s PAYD. The minimum is 5,000kms (as opposed to being sold in 5,000km blocks).

3. Real does verify the odometer of the vehicle in case of an accident, or when unused kilometers are to be refunded. It does not verify the odometer when the policyholder takes out the cover.

A related press release is also on this site, at this link.

Jordan Chong’s article:

Change to car insurance nets big savings

July 3, 2009

Basing the cost of car insurance on how far you drive can save people money and help the environment, a study says.

An analysis by the Institute of Actuaries of Australia found there was a potential saving of $3.2 billion per year if the cost of maintaining a vehicle was more closely linked to the number of kilometres driven.

One way of doing this was through pay-as-you-drive (PAYD) insurance, where the cost of the policy was based not only on the usual factors - driver age, gender, location and vehicle type - but also on how much the car was used.

The only provider of PAYD car insurance in Australia is Real Insurance, which has been in the market for about 12 months and sells insurance in 5000-kilometre blocks.

Real Insurance chief executive Roger Grobler said more than half of policy holders purchased the minimum 5000-kilometre option.

"If you're not using your car, you can't be involved in an accident," Mr Grobler said on Friday.

"The more you drive, the more the probabilities are of you being involved in an accident and the more your insurance should cost.

"Traditional insurance just doesn't work that way."

The Institute of Actuaries of Australia said the $3.2 billion annual saving - which equated to about $304 per vehicle - did not only flow to motorists in the form of lower insurance costs.

Cities and governments also benefited as fewer cars on the road meant fewer accidents, less congestion and reduced demand for road maintenance, as well as cleaner air through less pollution.

The findings were presented at the institute's biennial convention in April this year.

"Australians drive too much because much of the costs of driving are not paid directly by the driver or owner," the institute's Colin Priest said in a presentation at the convention.

"We estimate Australians will drive seven per cent fewer kilometres if Australia switched to PAYD."

Mr Grobler said a very small reduction in the extent to which people used their cars would have a "massive impact both for individuals and for society".

A financial analyst at Canstar Cannex, Joshua Zenas, said those with PAYD insurance had to keep track of how many kilometres they were logging.

"You need to be exactly aware of where you stand and how many kilometres you are left with," Mr Zenas said from Brisbane on Friday.

"That extra burden is there on a driver."

Mr Zenas said those who were not heavy drivers could potentially benefit financially from the PAYD method.

"There is a substantial level of savings based on the type of driving you do," Mr Zenas said.

Some PAYD providers overseas used annual odometer checks or installed a device in cars to keep track of driving distance, but Mr Grobler said Real Insurance did none of these things.

"It's based on a trust principle, there's no monitoring," Mr Grobler said.

Mr Grobler said PAYD insurance was available in the US, Canada, Japan, South Africa, India and parts of Europe.

The average motorist drives about 14,600 kilometres annually, according to figures from the Australian Bureau of Statistics.