Insurance Telematics and Usage-Based Insurance Products
The New York State Department of Financial Services (the "DFS") issued Insurance Circular Letter No. 4 on May 27, 2014 (the “Circular Letter”). The purpose of the Circular Letter was to alert stakeholders of the DFS’ interest in obtaining information about products that use embedded telematic devices, including usage-based insurance products (“UBI”) that provide benefits to insurers and policyholders.
As data capture and transmission technology become more advanced, and as user interfaces become increasingly sophisticated, many insurers are considering UBI and other programs that rely upon telematic devices to monitor the behavioral patterns, tendencies and habits of insureds. For example, when these devices are installed in an insured's vehicle, a telematic device can gather driving data, including miles driven, the time of day the driver used the vehicle, and his/her speed, acceleration and braking patterns. This data can be captured and transmitted on a real-time basis that allows insurers to make more effective underwriting determinations and to better align pricing with an insured’s driving tendencies and the resulting attendant risks. Other insurers have applied UBI to homeowner’s insurance where, for example, smoke and other alarms and monitoring devices can monitor and transmit details regarding the resident's risk-based activities (for example, whether and how often and how long the insured uses ovens and stoves on an attended and unattended basis). This data can be used to facilitate an insurer’s ability to correlate insurance coverage decisions with the insured’s actual behavior (as opposed to self-reported behavior) as measured by sophisticated home-based telematic devices. In addition, UBI and other programs provide the data on a real-time basis, as opposed to collecting information via traditional means, principally based upon post-claim reporting. Tempering increased UBI usage are countervailing privacy and data protection concerns and risks. Regulators, insurers and consumers have significant stakes in the availability, access and applications of this information.
The nuances (and risks) of the various UBI/telematics programs vary significantly. For example, for automobile insurance, some programs require the installation of a UBI device for a set amount of time in exchange for a fixed discount, while others link such installation for the duration of a policy period to periodic rate adjustments. For personal residential situations, some insurers provide discounts as long as the safety device is installed and functioning in the home. The DFS recently approved a combined driving, monitoring and cell phone control program that uses telematics devices to block a driver's ability to send text messages or make phone calls from specifically identified devices.
On April 10, 2014, under the authority of Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Pub. L 111-203) (the “Dodd Frank Act”) , the Federal Insurance Office of the U.S. Department of the Treasury (the “FIO”) initiated a study into the affordability and availability of automobile insurance to underserved communities and consumers, minorities and low-to-moderate income individuals. The FIO requested industry data from insurers and public response from policyholder groups and other stakeholders in order to provide information regarding influential factors needed to change a perceived potential imbalance in the industry’s underwriting and rating practices. Initially, the FIO’s stated focus is on automobile insurance, but the Dodd Frank Act allows the FIO broad jurisdiction that extends to all lines of business excepting only health insurance. Among the FIO’s questions is the use of personal information in insurance pricing and how it impacts the target consumer group. It is expected that the FIO’s study will affect the use of traditional rate factors such as education, occupation, etc., further enhancing carriers’ need to use UBI data and metrics to support rate making and form drafting.
This is an evolving area of insurance. The effective use of UBI and other technologies that allow insurers to better price and develop tailored insurance products is significant and an important step forward for carriers. However, the news is replete with examples of “hacking” that have exposed non-public personal information to unauthorized persons who, in turn, have used that hacked data for illegal purposes. The use and control of the devices and data is of paramount concern to all stakeholders. Insurers, consumers and regulators have a significant learning curve still. Although there are recognizable benefits to the industry (in terms of a more rational underwriting determination in light of the individual insured’s behavioral profile) and the consumer (in terms of robust added safety incentives, performance feedback and commensurate rewards), there also are significant concerns regarding privacy and data protection that remain.
For additional information regarding this alert, contact Robert Ansehl (firstname.lastname@example.org | 212.631.4410).