Usage-based insurance will be part of the private passenger auto market for years to come. Progressive Insurance thinks usage based insurance is a pretty good idea. When Progressive Insurance backs an idea it normally becomes part of the permanent insurance landscape. Usage based insurance is a kind of automobile insurance where the premiums are dependent upon type of vehicle used, measured against time, distance, behavior and place. It is also known as “pay as you drive”, “pay how you drive” and “mile-based auto insurance.”
Progressive Has Clout
On their website they have a entire series of pages and videos that teach you how to “dress like Flo”, who is the perky shop girl who pitches their insurance constantly on TV. For $39.99 you can even buy the official costume with an apron, “tricked-out” nametag, wig, I Love Insurance button, and headband. That is, if they had enough supply in stock. It seems to be a hot commodity when it’s actually on their shelves, but you could still buy a Flo bobblehead with a voice chip or two Flo t-shirts.
If Flo’s popularity doesn’t convince you that you should pay attention to what Progressive Insurance is doing, consider this. In 1987, Progressive sold about $1 billion in annual premiums. That same year, the nominal GDP of the United States was about $4 trillion. In 2012, the GDP of the United States was about $15 trillion and Progressive sold $16.4 billion in annual premium. Progressive is growing much faster than our country’s GDP over the last 25 years.
Leading The Way With IT
Further, it has been my experience that Progressive Insurance has largely been able to dictate terms to the private passenger auto insurance industry by being far ahead of the game in the area of information technology. In the non-standard auto arena they’re virtually the only market left in Minnesota. Fifteen years ago there were at least ten healthy non-standard auto markets in our state. Non-standard auto companies write the insurance for consumers with flawed driving records, poor loss history, or low credit scores.
As a matter of disclosure, I don’t like everything Progressive does. In fact, I once took action against them for statements they had made through my attorney, a former Minnesota Finance Commissioner. I was an agent for Progressive in the 1990’s. The old phrase “you have to break a few eggs to make an omelet” would seem to apply to their methods. They move so quickly into undefined territories that ethical guides are not readily available. Often, in my opinion, they push standards regarding agency compensation and relationship models with vendors.
I Admire Their Success and Innovation
Their long-time leader and inspiration has been Peter Lewis, their Chairman. He has been predicting the demise of the independent agency system for decades. He’s been consistently wrong on that, but they’ve been right on many, many other fronts. He states;
“In the first big industry speech I gave—45 years ago—I predicted the end of the independent-agent business and all the reasons why it was going to happen,” he relates. “I was right; the only problem is my time horizon. It won’t happen in my lifetime. The independent agent today has something to offer and still produces over half our business. They are more efficient in certain circumstances than a direct writer can be, and there is something about auto insurance that makes people like having an agent in between them and [their carrier]. But it’s irrational to think they can survive forever; shopping online is just so much easier. I wouldn’t invest in an independent agency.”
Mr. Lewis, the internet didn’t exist 45 years ago
Further, shopping online would be “easier” if insurance was truly a commodity. When a person is protecting a large amount of assets and has a complex insurance situation, they need an agent. That is the case with about 80% of consumers. That is why about 80% continue to involve an agent. That is also probably why Flo stands in front of a pseudo-store in Progressive’s commercials trying to sell you a box of insurance. Mr. Lewis’ comment about the “something” that causes people to want an agent between them and their insurance company is a basic need and people want to have a trusted advisor when making important and complex decisions.
The criteria for setting premium isn’t much different than how insurance has been priced over the five decades I’ve been in this business. The difference is that usage-based-insurance is based on actual current performance and data, not what you did in the past, as is conventional underwriting. The data is collected through a devise you plug into your car’s diagnostics port.
The usage-based-insurance movement has gone so far that a company called Metromile has started writing insurance in Oregon and Washington. That company, which somehow found $14 million in venture capital, have wagered their economic future on usage-based insurance and the somewhat erroneous assumption that the fewer miles you drive the less exposure you represent to an insurance company. That assumption is valid to a point, but when a person drives too few miles during a year they, erode their behind-the-wheel skills and fail to properly maintain their vehicle.
Cars are meant to be driven. I once had one car too many. My extra was a VW Touareg. I was driving it about every third week for the first eighteen months. Consequently, the car had a lot of electrical problems. For the last seven years I’ve put on about 15,000 miles a year and have driven it every day. Other than using a lot more gas than I would like, it’s been a wonderful car with very little in the way of unscheduled maintenance.
Metromile’s website makes it clear they’re seeking insureds who drive less than 10,000 miles a year. They will probably end up with adverse selection with a large group of driver’s who have impaired skills and poorly maintained vehicles.
Progressive started using a usage-based device in Texas in 1998, so this isn’t a new phenomena. At the start, the device had to be professionally installed. That device would penalize bad driving and wasn’t a huge success. In 2004 Progressive came out with a device that could be plugged in by the average driver. It had to be taken out periodically and plugged into a computer to upload the information to the company. That also met with resistance.
Wireless transmission came sometime later
The current Progressive reiteration is called Snapshot. It collects data and offers a 30% discount with no penalties. Progressive’s website states that over one million drivers have chosen Snapshot.
Progressive’s CEO Glenn Renwick states that surveys on the product are disappointing:
“30% say ‘yeah, why not’, 30% say ‘maybe, I need to know more’, 40% say ‘no way in hell’.” He says so far Snapshot is more of a burden to the company’s bottom-line than a help. “Intellectually, I kind of go ‘Why wouldn’t 100 percent of people take this option?’ ”
We had similar questions. We placed business last year for over 600 agents. Progressive is the number one private passenger auto insurance market in Minnesota for independent insurance agents, so we asked a group of agents what their clients thought of Snapshot. These agents are mostly in rural areas and probably quite conservative. The answers from these agents about their clients included:
“I have Snapshot on my extra car which is used exclusively by my 85-year old mother. She rarely drives so that qualified her for near max credits. She got demerits for hard braking, which I think mostly occurred in our driveway. For the most part, no matter how much you explain the program, people don’t like Big Brother in their car.”
“Over 60% of my Progressive clients said it is too much like Obama and did not sign up. I have lost accounts because they didn’t get the 30% discount.”
“It usually saves 10-15% for rural drivers. Once I tell them it only tracks mileage, time of day and breaking there is usually no issue.”
“A client reported he had to break hard on two occasions and the Progressive module let him know. In each case he was averting an accident, which would have been caused by the other party’s driving and lack of attention.”
(This made me wonder if Progressive might not be better served to find a method to track usage of personal devices while driving.)
Additional Progressive Snapshot hack comments
- “Several on the Snapshot program love it. It does not appear the system has GPS tracking built-in. However, numerous customers are not interested due to the GPS possibility.”
- “Fine as long as the customer gets the discount. Otherwise they let me know that they’re peeved and feel violated.”
- “From what I’ve seen it’s a waste of time unless you barely use the vehicle.”
- “Those who have done it and received the discount have been very pleased.”
- “My feelings are that Progressive raised their rates to the level where they aren’t competitive unless the qualify for a pretty good Snapshot discount. I have customer who work shifts ay a manufacturing plant and are driving late at night. I prefer the old methods of judging drivers.”
- “I have it on my personal auto and got the full 30% discount. It was a piece of cake.”
- “Not many takers. Not really a hassle but just don’t like someone monitoring their every move.”
- “Some initial concerns about privacy, but well worth the little bit of work to do it.”
- “If they’re in heavy traffic they shouldn’t try it.”
- “Not worth the hassle. Sometimes they don’t work and get a nasty email telling them to plug it in, or to return it, or they will be charged. That smarts because they aren’t aware it isn’t working.”
- “Customers think it’s an invasion of privacy, I haven’t sold one on it.”
- “It’s about 50%-50% those who think it’s an invasion of privacy and those who will use it and are pleased with the savings.”
- “Very few of our customers are interested. Many don’t like the insurance company to know when they drive and where they drive. Most are skeptical of the discount that they advertise.”
I’m a Hartford agent who produces a significant share of their business in Minnesota. They’re an excellent company who have missed the target so far with a similar program called TrueLane. The Truelane program tracks location, which seems to be an absolute non-starter in many people’s minds.
We think the world of The Hartford and place a great deal of business in the AARP sponsored program. We’ve been to a couple of their national meetings when they bring in their top ten or so agencies. They’re a responsive company with top management who want to hear about problems. They will hear about TrueLane from us, but not in this venue.
Of the companies I represent in my agency, the only other one who has a usage-based insurance program is Travelers. Thankfully it isn’t in their plans to bring it into Minnesota in the near future.
Allstate also has an extensive monitoring program called Drive Wise. The Drive Wise Ebook states that their program records:
- Driving time of day
- Hard and extreme braking
- Speeds at or above 80 MPH
They state that mileage is the most important factor. They argue that the lower the mileage the better. (Maybe I’m wrong and the people at Metromile are right?)
GMAC Insurance has offered a usage based insurance program through OnStar since 2004. It registers only mileage and offers discounts.
Liberty Mutual has a usage based monitoring product for its commercial clients that offers a 40% discount.
It reminds me of my days at Northland Insurance in the late 70’s. We had similar tools for recording driving habits of our owner-operators of over-the-road tractor-trailers. We quickly found that we had much better indicators of predictable behavior than paper trails of motor RPMs and governors. It was readily apparent to those of us who were underwriters that the drivers could manipulate the devices much better than they could avoid accidents.
At that time, we were much more concerned about “West-Coast Turn-Arounds” (amphetamines) than we were about fuel efficiency devices.
We were very skeptical of modifying the truckers’ behaviors. At that time a simple device was introduced that fit on the top of a truck-tractor that increased fuel efficiency by as much as 15%. The fairings did nothing but make the rig more aerodynamic. That was in the era of OPEC horribly overpriced gasoline. Yet very few owner-operators installed them. Today, these fairings can cost as much as $10,000 per truck, but will save as much as $95,000 over the life of a truck. If truckers didn’t make the logical purchase of a faring it was hard for we underwriters to believe they would respond to a Pavlovian system of setting their premiums.
A New York Times article about usage-based-insurance covered a lot of the ground about consumers concerns. The writer spoke to the “crude proxies” insurance company underwriters have used to “guess” the likelihood of a particular policyholder will have an accident.
I wonder if the New York Times has any idea how arduous it is to become an actuary. To be part of the Associates of the Society Actuaries requires passing five exams. The pass rate is under 50%. Does the Times really believe that insurance companies risk millions on “guesses”?
The Times shows its naiveté when it states that insurance companies have “used age, sex, marital, status, miles driven (as reported by the driver) . . . and even credit scores which can penalize those guilty of driving while poor.”
No, no one is penalized “. . . for driving poor”. Rather, the essence of underwriting is an endeavor to isolate those drivers who are irresponsible. Insurance companies take the factors from credit scores and use those that they believe will be a “proxy variable” for irresponsible behavior. They do NOT care how much money the person has. They care a lot about the percentage of a person’s credit that a person uses. They care a lot about not meeting financial responsibilities.
Insurance companies have found “insurance scores” based on credit information to have a high correlation with loss outcome. They have proven that theory many times and have shown the theory to work in actual practice for many years. When “credit” underwriting for private passenger auto was first introduced I was skeptical. It came on the heels of “red-lining” being outlawed. I thought the use of credit for underwriting might just be an ersatz replacement for “red-lining”, but was wrong. But . . . I asked the hard questions until I felt comfortable.
Of course, I had been involved with using credit underwriting to qualify commercial accounts since the early 70’s, so applying this discipline to personal insurance was a rather short leap.
When I’m on the road and people are traveling at a freeway speeds just a few feet away from me in the adjoining lanes, I’m soothed knowing that someone cares to measure driver’s responsibility. Insurance underwriting has a positive social influence.
It might surprise the Times reporter to know that insurance companies are a little skeptical about information supplied by applicants. It might surprise him even more to find out that certain auto repair shops have sold odometer readings to insurance companies, which are used to verify mileage. (Oops . . . I guess the reporter might have been “guessing” about some things.)
I’m usually a fan of the New York Times, so this is hard for me, but everyone has a bad day. The reporter seems mesmerized by the simplicity of usage-based insurance. He’s not to be blamed too much for that. Years ago there was a strong movement in California to sell auto insurance by placing a surcharge on gasoline. It was called “pay at the pump”. It was flawed logic, and so is an over-simplified system of pricing based on mileage.
To me basing a rate mainly on miles driven is a bit like judging a restaurant solely on the size of the portions. I was raised in North Dakota where you could drive hundreds of miles and not see the number of cars you will see in two minutes on most city freeways.
I agree with Warren Buffett. Buffett said at Berkshire’s annual shareholders meeting in May 2013 that auto insurers are watching what Progressive does “with interest,” even though GEICO has no plans to roll out a similar product. There are other ways to segment customers, he said.
I will give the Times reporter points for presenting the braking issue. I also wonder what the company’s defense will be when the court rules that “but for” the monitoring device in the car, the defendant would have braked harder and avoided the accident that resulted in multi-million dollar injuries.
Unlike the consultant in the Times’ story, I don’t think the day will come when having a device in your car is the norm and opting out will indicate that you’re a bad driver. Responsible people care and protect their privacy. It is a huge issue and should be.
To me usage based insurance is a marketing gimmick. There are many, many ways to check mileage, such as the glass and auto shops I’ve mentioned. I just did an online search on “Progressive Snapshot hack” and found many, many interesting articles on ways to get around the system. If the system is unreliable it is basically useless for its primary purpose.
Usage based insurance seems to be merely a method of convincing the buying public that they are getting a good deal.
P.T. Barnum would have loved it.
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