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The other auto insurance telematics shoe drops: who wants to be adverse selection lunch for Progressive?

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Celent have reviewed this profile and believe it to be accurate.
27 March 2015
Donald Light
Until now US insurers have intentionally restricted the impact of their telematics programs by holding riskier drivers harmless. In other words, insurers told policyholders in their telematics programs that their premium could only go down or remain the same. Higher risk drivers’ premium would not be increased even if the telematics device revealed driving behavior which actually deserved a higher premium. But now the world has changed. In its 2014 annual report US telematics leader Progressive dropped this bombshell: “. . . we are affording more customers discounts for their good driving behavior while for the first time, increasing rates for a small number of drivers whose driving behavior justifies such rates” (Celent emphasis). See Bloomberg for the full story. Progressive is saying that when its telematics data indicates a higher premium for a given policyholder, it will charge that higher premium. If that policyholder can find a lower premium at another insurer, Progressive is quite happy to have that other insurer issue that policy, leading (on average) to higher losses, for a lower premium. In insurance this is known as the other insurer experiencing adverse selection. At its most basic level, being a successful insurance company is simple. Understand the risks that are submitted to your underwriters, and charge the right premium for those risks. Progressive is not a stupid company. With this announcement Progressive is signaling that its Snapshot telematics program lets it charge a more accurate and higher premium to certain risky drivers—and it jolly well will do it. If other leading auto insurers’ telematics data leads to the same conclusion, they will have to follow Progressive’s lead. Eat or be eaten.

Comments

  • […] you could say that telematics is hot, and all personal and commercial insurers writing auto insurance are scrambling to build market share. That is true […]

  • […] you could say that telematics is hot, and all personal and commercial insurers writing auto insurance are scrambling to build market share. That is true […]

  • […] adopters (such as Progressive) could realize the benefits of better risks.  And, as Celent’s Donald Light points out in a recent blog post, those that take the higher risks at a lower premium would, on average, be the recipients of […]

  • I have a different take. When this pattern evolves, ideally Progressive will have (or is expecting itself to have) only good drivers, and the discounted pricing should take care of the bottom-line, with the exit of bad drivers.
    Charging higher premium will result in shifting customer base (and hence risk profile), but the intent of discounting should be to convert bad behavior to good. With the current set up, bad driver has an incentive to change driving pattern because of potential discount; with the proposed set up, behavior won't change! Short term impact: re-distribution of risk profile and bottom-line increase; long-term impact: hit in top-line, if different model is followed by competitor (for reward/punishment).

    This is not to say Progressive shouldn't invent. They are the geniuses of UBI!

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