Seizing Advantage

Canadian auto insurers have been slow to embrace usage-based insurance (UBI), but the time for taking a “wait-and-see” approach is coming to an end.

Telematics and UBI are here to stay, and they support a future where, broadly, data plays a key role in driving the strategic agenda of carriers. Insurers should take steps now to develop telematics offerings to seize an advantage and remain competitive in the years to come.

TELEMATICS IN BRIEF

In the context of auto insurance, telematics refers to a range of technologies – from GPS location services and wireless connectivity – that are used to collect and analyze the driving behaviour of individual policyholders. Telematics provides insights into policyholders’ actual driving behaviour, which can then be used to price risks more accurately. In turn, customers pay premiums that reflect their personal driving behaviours rather than the behaviours of their demographic.

Good driving habits are rewarded with discounted premiums, while poor habits – in theory, at least – result in higher premiums.

CANADIANS TAKING THE SLOW ROAD

While telematics offerings have been available for some time in the United States, Europe, Australia and South Africa, they remain relatively uncommon in Canada. A handful of insurers have introduced telematics products in recent months, yet other carriers appear to remain hesitant to take the plunge themselves.

Several factors are behind the Canadian market’s slow adoption of telematics. Insurers struggle to choose from an array of telematics technologies and business models: Automakers, tech firms and third-party telematics service providers (TSPs) are actively promoting alternatives ranging from plug-in OBD2 (on-board diagnostics) units to smartphone-based apps to manufacturer-installed “black boxes” in vehicles. Some insurers are deferring making a decision for fear that they will make the wrong one.

At the same time, Canadians have a lukewarm attitude towards telematics. In part, this is a matter of understanding – many Canadians simply do not know enough about telematics yet.

However, the chief concern is privacy. In a recent Deloitte study, almost 40% of the 768 Ontario and Quebec home and car insurance policyholders polled reported they would not be willing to install a device in their vehicles due to privacy concerns.

Canadians are not keen on having “big brother” track their driving, and they worry about how that data will be used. These concerns make it difficult to gauge the potential size of the telematics market opportunity.

Further complicating the picture is the fact that provincial regulators themselves harbour different perspectives on how telematics should be implemented.

One province allows insurers to adjust rates up or down based on telematics data. In another jurisdiction, drivers must explicitly opt-in for telematics offerings, and insurers are permitted to use data to discount rates, but not raise them. Other provincial regulators are watching these jurisdictional “experiments” with interest before making their own decisions.

INSURERS RISK FALLING BEHIND

The uncertainties around how telematics will play out in Canada may lead some insurers to conclude that it is better to wait until the dust settles before making a move. By doing so, however, insurers run the risk of ceding ground to their competitors – ground that they may not be able to make up in the future.

Deloitte takes the view that adopting telematics sets the stage for significant competitive advantage over the long term.

The reason lies in the enormous amount of customer data that telematics devices provide to insurers. This data allows insurers to better understand individual driver behaviour, and can inform pricing decisions, product development and marketing strategies.

It also means that early-adopters can better identify and shed high-risk, low-profitability customers – and, conversely, find, attract and retain highly profitable policyholders.

Yet early-adopters stand to benefit beyond the obvious and intended advantages delivered by telematics.

The introduction of telematics is driving the need for more sophisticated data analytics tools and capabilities that can help insurers to not only understand their customers’ driving habits, but also to gain insights that assist in creating value-added services that engage and delight those customers.

For example, telematics data can offer “gamification” opportunities for customers using leaderboards, contests and rewards to better engage and retain customers.

Telematics data – especially as the technology grows more refined – will enable insurers to deliver services and advice once unthinkable. These could range from alerting drivers to delays along their chosen route to providing tips for safer driving and even offering discounts at retailer partners along drivers’ usual commutes.

These added features can help insurers to deliver the kind of personalized attention and service that today’s customers increasingly demand.

Moreover, the experience and capability that insurers gain today from adding telematics to their offerings will enable them to better seize the opportunities taking shape as the “Internet of Things” becomes a reality. Within the decade, billions of devices and sensors – from water meters to thermostats to household appliances – will be delivering a steady flow of data to homeowners, institutions and service providers. This will bring today’s telematics revolution to home insurance and to life and health insurance as well.

The carriers that have learned how to turn policyholder data into actionable insights will be able to capitalize on the potential of this new technology.

STEPS TO TAKE NOW

It is still early days for telematics, especially in the Canadian market. There are many issues to be resolved. Which technology platform or platforms will come to dominate? How large is the market for telematics offerings?

It is difficult to predict technology winners. It is anticipated that automakers will introduce equipment on new cars that can be leveraged for telematics purposes, perhaps capitalizing on moves by technology companies to get their operating systems into vehicles.

It is also expected telematics-driven UBI will comprise a sizeable proportion of the auto insurance market, but it will not replace traditional methods of underwriting and pricing.

Despite this uncertainty, insurers would be well-advised to take steps towards developing a telematics capability.

Telematics is only the beginning of a data-driven revolution that is poised to transform insurance. To remain relevant and competitive in the “Internet of Things” world to come, insurers must start to build the capacity to collect, analyze and act on their customer data.

• Get in the game. Insurers should invest resources into understanding how they can incorporate telematics and UBI into their offerings. Insurers that fail to step into the telematics arena today will lose competitive ground to those that do, and catching up will be nearly impossible.

• Start small. Take time to pilot a telematics offering with a small group of willing customers. The insights and feedback gained from the pilot project can be used to refine your approach prior to a wider rollout.

• Do not focus solely on “front-end” telematics technology. It is all too easy to get lost in trying to decide which technology a carrier should use for its telematics solution. Use pilots to explore various technologies to find one that best fits the needs of the company and its customers.

• Invest in back-office infrastructure. The technologies used to gather and transmit telematics data are certain to change and evolve in the years to come. What will not change is the need for a robust, flexible and scalable infrastructure that can support telematics and UBI. Insurers should invest in devel oping their data analytics capability to gain actionable insights from customer data – as well as their capability to turn those insights into programs that engage those customers.

Canada’s telematics and UBI revolution is just beginning. While it remains to be seen how widely telematics is adopted in the Canadian market, it is here to stay, because it will provide insurers with a new basis on which to more accurately assess and price risks.

Yet more importantly, it will deliver the means for insurers to better understand and engage their customers – and that will be the real competitive advantage in the years to come.