Image source: Progressive.
It seems as if driverless cars are racing away with all the headlines, but there's another narrative deserving some attention. Though not quite as exciting as autonomous cars, auto insurance -- specifically, usage-based -- is gaining support from insurers such as Progressive (PGR 0.48%) and Allstate (ALL -0.07%). Forecast by Visiongain to generate $60 billion worth of premiums by 2020, usage-based insurance (UBI) illustrates just another way that the Internet of Things (IoT) is driving innovation.
Plugging in and driving down the road of disruption
Traditionally, insurers have based rates on comparisons between drivers in similar demographics. However, with a UBI model, an insurer provides a driver with a device that plugs into the car and collects various data about his driving habits. Having received the data, the insurance company is able to better profile the driver's risk and construct appropriate policies and premiums, which benefit both the insurer and the driver.
An early adopter of the model, Progressive collected $2.6 billion in premiums from its customers who participated in its UBI program, Snapshot, in 2014. In its annual report, management recognized the success of the program, citing that "the Snapshot portion of our business continues to grow at a rate considerably faster than the business as a whole." That's putting it mildly: Snapshot premiums increased 30% from 2013 to 2014, while Progressive's net premiums grew only 8% during the same period.
Progressive was an early mover in adopting the UBI model, but its competitors are also availing themselves of the disruptive model. For example, Allstate offers customers UBI through its Drivewise program. Management doesn't break out specific financials on Drivewise, though it states that it plans to "to invest aggressively in automotive telematics" so as "to provide more accurate pricing to customers, improve the driving experience, and find new revenue sources." Though it's unclear how Allstate compares with Progressive in terms of UBI, it's worthwhile to note that Allstate's auto premiums improved only 5.2% from 2013 to 2014.
Delivering the data
To provide this type of policy to its customers, insurers must first be able to collect the requisite data. For this, companies are turning to telematics and machine-to-machine (M2M) connectivity leaders such as Sierra Wireless (SWIR). The company's modules provide a scalable solution that can switch between 2G, 3G, and 4G networks, while its AirVantage Cloud platform offers insurers a cost-effective way to collect and store customers' data. Collaborating with Octo Telematics, Sierra Wireless is helping more than 40 insurance companies offer UBI policies to customers worldwide.
Also specializing in M2M, CalAmp (CAMP -1.19%) gained exposure to the UBI market when it inked a deal with Modus in 2014. In doing so, CalAmp established a substantial presence in the industry, for Modus provides telematics solutions to Allstate through Allstate Canada and Esurance. These deals may just be the entrance ramps toward highways of substantial growth. According to research from Berg Insight, the total number of UBI policies is forecasted to increase from an estimated 4.2 million policies at the end of 2014 to 32.5 million policies by 2019 in the U.S., and from 4.8 million to 28.1 million over the same time period in Europe.
Once the installed device collects the data, it must be transmitted back to the insurer. Herein lies the opportunity for telecoms. Recognizing the IoT as its next great growth opportunity, AT&T (T 1.17%) is providing the connectivity for both Progressive and Allstate's UBI programs. With these two deals, AT&T is servicing two of the top five auto insurers in the U.S.; combined, Progressive and Allstate account for more than 18% of the market share. AT&T faces formidable competition from Verizon (VZ 2.85%), whose In-Drive solution provides network support for the largest domestic auto insurer, State Farm.
Over the past five years, AT&T has invested $98 billion in its infrastructure. Image source: AT&T.
Unlike AT&T, though, Verizon is further monetizing its program by charging customers a $6.99 monthly subscription fee. With more than 18% share of the auto insurance market, State Farm offers its customers an initial 5% discount when they enroll in its Drive Safe and Save program; however, the company suggests that after enrollment, customers can save as much as 50% on their premiums.
The next Google?
Providing insurers a more reliable way to assess the risk profiles of those it insures, there seems to be substantial incentive for companies to adopt UBI models. As UBI policies gain greater acceptance in the industry, insurers will accrue massive quantities of data regarding their drivers' habits. What's a company to do with it all? Why, sell it to advertisers of course. That's how Alphabet made its bones, after all. In speaking at a conference last May, Allstate's chairman and CEO, Tom Wilson, suggested that generating a new revenue stream from selling data is certainly on the table: "Could we, should we sell this information we get from people driving around to various people and capture some additional profit source and perhaps give a better value proposition to our customers? It's a long-term game."
The takeaway
Innovation and insurance are rarely uttered in the same breath, but that's the power of the IoT -- re-imagining the potential of various industries, such as auto insurance. Investors must brace for a bumpy ride in the short term while companies such as Sierra Wireless and CalAmp pave the way; however, the outlook suggests smooth sailing is not too far off in the distance. Willing to take the ride? Be sure to dig deeper to make sure this is the trip for you.
