There is no escaping talk of telematics these days and what that may mean for automobile insurance. But will telematics put an end to age and gender discrimination?
Telematics has been one of the most talked about issues within the automobile insurance sector over the past several years. Recently Desjardins General Insurance Group launched Ajusto, the first widely available automobile insurance program in Ontario that offers savings to drivers centered on usage-based insurance (UBI) technology. This is ground-breaking territory in Canada despite the fact that pay-as-you-drive insurance has been available in the United States and Europe for some time.
Automotive telematics refers to the technology that uses hardware and software applications with remote communication devices, such as cellphones, GPS and wireless devices, to obtain information about vehicles. Automotive telematics has been in use, mostly in high-end vehicles, for quite some time. But today newer technologies are helping unfold many opportunities for all stakeholders, and more importantly, in emerging economies.
Telematics enables vehicle owners or customers to constantly be in touch with service providers through incorporated software and hardware in their vehicles. In turn, service providers, too, can offer a host of new services based on their customers' preferences.
Also, data sent remotely from a vehicle allows stakeholders such as automakers, dealers, fleet managers and insurance providers to build better customer-relationship strategies.
There have been tomes written on the benefits of telematics and UBI, including lowering premiums for good drivers¸ reducing traffic congestion, allowing parents to monitor teenage drivers and combating auto insurance fraud.
What we have not heard much about is that UBI will allow insurers to begin to move away from historical rating criteria such as age and gender, both of which have been contentious over the years.
In 1983, Michael Bates alleged that he was discriminated against because Zurich Insurance charged him higher premiums for his automobile insurance than a young, single, female driver with the same driving record or than drivers over age 25. Bates alleged that the rate classification system discriminated by grouping drivers by age, sex and marital status and determining their premiums based on these factors.
Moving forward to 1992, a majority ruling by the Supreme Court of Canada found that Zurich did not discriminate against Bates contrary to the Ontario's Human Rights Code by charging him higher premiums for automobile insurance because of his age, sex and marital status.
The high court reasoned that charging higher premiums to young, unmarried, male drivers was discriminatory and contravenes the Human Rights Code. However, section 21 of the code permits discrimination in automobile insurance because of age, sex, marital status, family status or handicap, and the court determined statistical evidence showed that young, male drivers are involved in proportionately more - and more serious - accidents than other drivers.
The insurance industry, however, was not totally absolved by the Supreme Court ruling. The high court encouraged the industry to begin looking more closely at non-discriminatory alternatives in rate-setting in the automobile insurance industry. It ruled that the insurance industry could continue to use discriminatory criteria such as age and marital status as a bona fide means of assessing risk, but that the industry could not do so indefinitely.
To a certain extent, insurers have used the Bates v. Zurich decision as a green light to base automobile insurance premiums on age, sex, marital status and other socioeconomic factors where statistical evidence supports higher rates. It may be a matter of time before there is another court challenge.
However, the next time it would be difficult to defend the existing practices now that non-discriminatory alternatives actually exist.
The move away from rating based on age, sex and marital status has already begun. It is prohibited to use gender in considering rates for automobile insurance in five provinces, with Alberta only allowing its use for private policies, not through the government-mandated scheme. Ontario, with the largest share of the privately delivered automobile insurance market in Canada, still uses age, sex and marital status in determining premiums.
In the U.S., California recently joined 11 other states that prohibit gender rating in the individual health insurance market. Consumer groups south of the border have been battling insurance regulators to prohibit or restrict non-driving factors in setting automobile insurance premiums. As it stands, insurers have been able to maintain the status quo while developing UBI programs that provide an alternative.
The European Union recently outlawed gender-based insurance premiums. The European Court of Justice's ruling, which follows a 10-year legal battle against the proposals by insurers, will put an end to women getting better deals on car insurance.
The ruling has increased pressure on the industry to adopt better discriminating factors, like those available through telematics.
THE HOME FRONT
It is not just rating based on age, sex and marital status that is under the microscope, but other socioeconomic factors like credit scoring as well. Ontario, Alberta and Newfoundland and Labrador have banned the use of credit scoring in auto insurance as a result of pressure from politicians. Politicians, supported by insurance brokers, have begun to turn their attention to the home insurance market, where the use of credit information is also used.
The Office of the Privacy Commissioner of Canada recently released a report stating it did not object to the use of credit information for purposes of assessing insurance risk. It was noted section 8 of Ontario's Consumer Reporting Act confirms that credit information may be disclosed for the purpose of underwriting insurance. However, the commissioner also noted there is no obvious link between credit information and insurance premiums - and little transparency in the use of credit information.
So while the use of age, sex and marital status, as well as other socioeconomic factors, in rating drivers has been upheld by courts and tribunals, their continued use attracts criticism and, in some cases, legislative action.
Although UBI is still not available to many drivers, insurers who are considering moving towards UBI ensures that predictive criteria continue to be available as governments prohibit or restrict traditional criteria. In Canada, automobile insurers are keeping a close watch on developments at Desjardins.