However, there has been little insurer activity around using telematics to support mileage-based rating. Despite Progressive's well-publicized initiatives that date back 10 years, only a handful of carriers since then have piloted UBI programs. (Progressive has a trademark pending on "Pay As You Drive" in the U.S.; Real Insurance claims a trademark on the term in Australia.)

Why the disparity between supposed demand and actual supply? "Telematics has been slow to take off among P&C carriers for many reasons, including the cost of the hardware and internal technology requirements needed to support this product type, such as modification to policy administration and billing systems to support usage-based products," says Harris-Ferrante.

In order to support UBI technologically, insurers need to be able to digest information from telematics devices and perform more granular, tiered-based rating than many currently can, states Mark Purowitz, a partner the insurance industry practice at Diamond management and technology consultants. "There are very few companies that do 'micro rating' right now. If they're going to capture driving characteristics–how many times someone pressed the brakes, how they accelerate–those are new types of algorithms that are going to have to be built," he says.

Companies also need to decide what type of telematics devices to use to obtain driving data–or even whether to use an in-vehicle device at all. As a result, within the industry today, there are two approaches to UBI that directly influence technology decisions: track or trust.

GPS TRACKING

Progressive was the first insurer to explore tracking-based systems, patenting the idea of using in-vehicle sensors and devices to record how a vehicle is operated and transmit that data through wireless technology for use in rating. It piloted a program, called Autograph, in Texas in 1999, using a retrofitted "black box" device that included GPS and cellular technology. According to Bill Everett, Progressive's product development manager of usage-based insurance, the program was "successful with customers but was discontinued in 2001 because of the cost and logistics of retrofitting devices into vehicles."

Progressive later licensed the idea to Norwich Union in the UK. Norwich deployed a UBI product in 2004, tracking customers' vehicles and adjusting premiums depending on when a vehicle was being driven by using a device from UK-based Trafficmaster Telematics, which relayed information via satellite. However, Norwich discontinued its program in 2008, two years after it was introduced, reportedly due to lack of consumer interest and lack of support from auto manufacturers. (The company did not respond to requests for comment.)

Likewise, other companies' GPS-based tracking programs have been slow to get off the ground. Published reports of a federal grant received in 2007 by the Washington State Department of Transportation detailed that a pilot program in King County with Unigard Insurance would use a GPS-based device to monitor where, when, how much, and how fast a vehicle is driven, with data being used to develop the insurance premiums. However, today the tool still is in the developmental stage, awaiting approval from King County, according to Unigard spokesperson Anne Smith, who adds, "another method to gather only odometer readings" will be part of the project, as well.

"What's awaiting approval with King County is the study to gather data–that's the first step," Smith explains. "An actual mileage-based auto insurance product is farther out in terms of development."

NON-GPS TRACKING

Privacy is an issue that is inseparable from any discussion of GPS-enabled telematics and UBI. "People fall back to [the argument of] 'I don't want anybody tracking where I've been and where I'm going,'" says Purowitz.

Unless and until those concerns do disappear, insurers in the U.S. evaluating UBI, including Progressive, are focusing today on non-location-based telematics.

After discontinuing Autograph, Progressive went back to the drawing board and, in 2004, piloted the "TripSense" program. TripSense used a non-GPS device plugged into a car's onboard diagnostics (OBD-II) port. Initially, the TripSense program required policyholders to install their device in the vehicle, then periodically remove it, connect it to their PC via a USB connection, and upload data to Progressive.

Although it did not report vehicle location, the device did perform more than mileage tracking. According to Everett, it recorded vehicle speed and time and when the device was connected and disconnected from the vehicle. Other information, such as miles driven and rates of acceleration and braking, was derived from the speed and time information.

In 2008, the company announced an expanded rollout of the program and rebranded it "MyRate." Currently, MyRate is available in eight states: Kentucky, Alabama, Louisiana, Maryland, Michigan, Minnesota, New Jersey, and Oregon. Progressive bears the cost of the device but charges policyholders a "technology fee" in certain states.

The upload procedure for the device also changed to a wireless network connection that requires no device removal. According to Richard Hutchison, general manager of MyRate, the company sources the device from its exclusive vendor, Xirgo Technologies LLC of Camarillo, Calif.

Progressive calls MyRate a "behavior-based" insurance program because it tracks not only miles driven but also how and when those miles are driven. Drivers who exhibit safer habits or drive during safer times–per Progressive's proprietary algorithms–receive lower premiums as a reward. Progressive spokesperson Susan Gallik Rouser indicates rating for new variables required changes to Progressive's back-end administration systems but declined to specify what changes were needed or how those algorithms are derived.

Progressive reports a full one third of customers who are offered the MyRate program sign up, and Everett believes the program will overcome some of the cost and logistics problems that hamstrung the previous technology.

"Unlike Autograph and TripSense, the MyRate program features a wireless device that can be self-installed. These features make the program easy to use and more convenient for the customer," he says.

Like Progressive, GMAC Insurance takes a non-GPS tracking approach to its "Low Mileage Discount" program, which uses GM's factory-installed OnStar diagnostics and information device. However, unlike Progressive, GMAC Insurance tracks only miles driven, not how they are driven.

A miles-only approach is one Purowitz says goes even further to address consumer concerns with telematics. "People are very leery of the fact that, while they might drive within the parameters of a [behavior-based] program the majority of the time, the outliers might somehow impact the potential benefit," he explains.

OnStar is a GPS-enabled system, using cellular technology to link vehicles and drivers–and their location–to the OnStar service center. OnStar also collects maintenance and diagnostics information from a vehicle's operating systems. In establishing the parameters of its UBI program, John O'Donnell, vice president of business development at GMAC Insurance, reports the insurer considered using some of this data in its rate making but elected not to in either the program's pilot or its July 2007 national rollout.

"So far, we've found customers are comfortable opting in and they like the transparency of understanding how they're going to be rated based only on mileage. They fit into a tier, and we publish those tiers in a chart. I think there would be more concerns if we collected other information and didn't share openly how [we] were using [the data]," O'Donnell says.

New customers in the program receive a discount based on their OnStar history of miles driven, if known, or a 26 percent discount based on an under-10,000-mile rating tier, if not. On a weekly basis, OnStar provides GMAC Insurance with a file of mileage data for subscribers who have opted into the program. Based on that information, at policy renewal, GMAC Insurance will adjust its premiums using discount tiers corresponding to miles driven. Customers who drive more than 15,000 miles per year are not penalized but receive no discount.

As part of the partnership with GMAC Insurance, OnStar sends personalized e-mails to targeted subscribers who are eligible for the discount based on actual historical miles-driven information in the OnStar database. OnStar subscribers who respond to the e-mail and opt in to sharing mileage information are linked to the GMAC Insurance online quote portal, which is prepopulated with information to streamline the application process.

O'Donnell reports 17 percent of the insurance policies GMAC Insurance sold through direct marketing efforts in 2008 included the discount, up from 7 percent the previous year. "Currently, we have more than 30,000 people enrolled in the program," he says. "We have seen 150 percent annual growth, year over year, in new customers."

He attributes growth in the program not only to the fact that drivers receive a discount but also that it requires no effort on the part of consumers to use. "They get the e-mail and can respond to it, and it happens automatically. OnStar itself is user-friendly with no user install required. There's no downloading [from the OnStar device] required by the customer," says O'Donnell. Additionally, he believes policyholders see the insurance discount program as an extension of the service package they buy as OnStar subscribers.

TRUST

Both Progressive and GMAC Insurance take a retrospective approach to UBI, setting premiums based on miles policyholders have driven in previous terms. However, 2008 start-up insurer MileMeter takes a different approach that is truly "pay as you go": Policyholders buy insurance for a specific number of miles, and once those miles have been driven or the term of the policy runs out, coverage expires.

For consumers accustomed to having insurance in-force for a specific period of time as long as premiums are paid, this approach could mean an adjustment. However, Chris Gay, CEO of MileMeter, claims the program works because, despite greater accountability required, MileMeter provides transparency to premium calculations that consumers appreciate.

"People understand exactly how their premiums are calculated, know exactly what they're going to pay based on how much they drive, and can make informed decisions based on that information," Gay relates.

MileMeter uses no in-vehicle device to confirm miles driven. "We trust our customers; we don't track them," Gay says.

More accurately, MileMeter's approach is "trust but verify." Although the company doesn't monitor miles as they are driven, it does receive odometer readings from vehicle emission, maintenance, and registration databases nationwide. It then matches that information against VINs of newly insured and renewing vehicles to confirm policyholder assertions. It also sends reminder e-mails to policyholders before purchased miles are expected to run out in order to minimize unexpected policy expirations.

Based on its approach to UBI, MileMeter didn't have to contend with any technology issues or privacy concerns around tracking devices; instead, its challenges centered on back-office systems and administration. "First, the rating system needed to accommodate a proprietary rating approach, and then we had to interface with third-party system APIs and our own underwriting system. We also needed to handle accounting for policy administration–how to earn premium on a policy denominated in miles or a combination of miles and time," explains Gay.

The insurer elected to develop its own rating, policy, and claims administration platforms. "Commercial off-the-shelf systems by their nature are legacy systems. We felt the uniqueness of distance-based insurance could not be adequately accommodated by them," Gay indicates. "We wrote the majority of our software in Ruby, using some Java, and we heavily utilize open source technology."

MileMeter built its administration platforms to operate in the "cloud," using Amazon's Elastic Compute Cloud (EC2) infrastructure and affiliated Web services. "We needed something that could scale in extremely short time frames. That required software that was developed to expand across an elastic storage network and computing cloud, such as Amazon's, which allows us to go from the equivalent of one server to one thousand servers within minutes," he says.

Although its current customers are exclusively in Texas, beginning in 2009, the company plans to expand into other states. It also intends to license its policy and claims administration systems to other insurers.

Gay would not cite specific revenue figures but claims response to its UBI product has been "fantastic" since its rollout on Oct. 15. He also points to anecdotal evidence for other benefits.

"If you want people to reduce their miles driven and get all the societal benefits–lower driving, fewer greenhouse gases, and so on–pricing must be linear and transparent, and that's what we offer. People do change their behavior as a result, and consumers who already are low-mileage drivers are encouraged to continue that behavior," he notes.

WHICH WILL PREVAIL?

Only time will tell whether both the "trust" and "track" models will compete evenly or one will prevail over the other.

"We believe tracking people is doomed to failure because of privacy concerns, or it is destined to be only a small market niche," says Gay. "It comes down to cost and convenience. Every time you add another device, it adds costs, diminishes your competitiveness, and decreases convenience."

Stephen Longden, specialist in telematics at the UK-based auto industry consultant SBD, believes tracking will dominate. The trick for insurers, he says, is bundling benefits with tracking devices.

"For usage-based insurance to be a success, it will require installing one kit in your vehicle–a GPS- and GSM- [cellular]-based kit–and using it for a whole variety of applications of which insurance will be one. You'll also get stolen vehicle tracking, navigation, traffic information, or more leisurely things, such as [information on] restaurants and amenities. If you're sharing the same vehicle kit, you're dividing the cost of the application," he says.

Harris-Ferrante contends insurers that use telematics only for mileage reporting in premium calculation are missing one of the technology's key benefits. Omitting GPS-type tracking technology "would eliminate many of the privacy fears among consumers, but it also would erase one of the benefits of telematics–the ability to locate a vehicle if it were stolen, for example," she says.

The type of bundling Longden proposes could involve actual alliances with vehicle manufacturers, such as the relationship between GMAC Insurance and OnStar. Or it could result from the emergence of a third-party device provider that can serve as a data broker to insurers.

"There is a possibility for some sort of trusted third party to collect all the tracking data, process it, and send it somewhere. That could be to an insurance company, or it could be to another company that offers location services such as stolen vehicle tracking," Longden says.

"In that way, insurers don't get involved in doing deals with vehicle manufacturers and dealing with the complications of getting hardware and software into vehicles. All insurers would have to do would be to buy the data from a telematics provider," he adds.

Ultimately, it will take a combination of push from insurers and pull from consumers to drive UBI to the mainstream. However, that's something Harris-Ferrante doesn't see happening in the near future. "Gartner does not feel telematics will take off significantly during the next three years within the U.S.," she says, maintaining that lack of market pressure from other carriers and discontinued pilots at large companies will impede its adoption among P&C insurers, at least in the short term.

And there may be more pressing issues for insurers to contend with than telematics. "I don't think insurance companies will be willing to invest [in telematics], particularly in this market," Purowitz claims. "At this point, insurers have a far greater hurdle of getting their houses in order by remediating older systems and technology architectures."

Yet despite aborted programs and limited availability of UBI in the marketplace so far, Harris-Ferrante says insurers shouldn't give up on the idea of "pay as you go." "Insurers should be actively involved with these initiatives," she advises. "Insurers ultimately will need to craft the strategy and build the business case around offering telematics-based products to their customers." TD