Driving Forward

Technological progress is unstoppable.

One need look no further than vehicle telematics to see how technology is unfolding in a rapidly developing field. Modern vehicles are packed with an increasingly long list of sophisticated technical assistants: GPS, automatic distance sensors, emergency braking systems, lane assist to alert a driver when the vehicle breaches a lane boundary, and infrared sensors that project an image directly onto the windscreen to warn the driver of pedestrians at the roadside, to name but a few.

Driverless vehicles that safely reach their destination, communicate with traffic lights or even communicate with one another – these are just a few of the visions presented by vehicle telematics. But what impact will telematics have on insurers’ businesses?

EXPANDING REACH

The continued growth of telematics in the motor market affords insurers access to a wide range of new and additional rating criteria. Once that telematics data is in hand, insurers can explore and enter into new approaches to rating design and pricing models that can replace the prevailing practice.

Telematics awareness is definitely trending in Canada. In a survey from early 2012, conducted by Canadian practitioners, more than half of the respondents had a low level of understanding of the technology. However, awareness rose by the time a second poll was completed in August 2012, when more than 60% of respondents reported having a high degree of awareness. Beyond awareness, an additional 10% of respondents noted being involved in a telematics project.

Last December, Boston-based Strategy Meets Action (SMA) reported three-quarters of the approximately 200 North American insurers surveyed said they believe that UBI will fundamentally alter the auto insurance industry between now and 2020.

“Telematics is rapidly gaining momentum, and every auto insurer should be thinking about their plans for telematics and usage-based insurance,” Mark Breading, co-author of Usage-Based Insurance/Telematics: a Catalyst for Change, and SMA Partner noted in a statement.

Survey results indicated 70% of North American property and casualty insurers are engaged in some stage of UBI, whether that be operating active programs, conducting pilots or building strategies. Almost 20 auto insurers are running UBI programs in the United States and Canadian markets, and eight of the top 10 U.S. companies have UBI programs or pilots under way, SMA reported at the time.

It is anticipated telematics’ potential to add value to insurance products and reduce claims-handling costs will pave the way for the technology to rapidly develop over the coming years.

“Telematics is going to have a profound effect on the auto insurance business,” said Richard Welch of REW Consulting and co-author of the SMA report. “Even if consumer adoption is in the low end of the consensus range, usage-based insurance will grow rapidly, and as it grows, the traditional market will shrink, making it very difficult for companies not playing in the usage-based segment to maintain market share.”

Munich Re sees some feasible propositions and uses for insurers, including the following:

• perform better risk selection – risks deviating positively from the norm can be incentivized with services or the offer of lower premiums; and

• base premium on driving behaviour – having actual driving influence the rate provides high motivation for the insured to avoid undesirable behaviour.

TARGET MARKET

In Europe, the introduction of unisex pricing has lent new impetus to telematics-based insurance. Since the start of 2013, European insurers have no longer been able to use gender as a rating factor in motor insurance. But rating factors used in telematics-based insurance allow the driving behaviour of every policyholder to be observed and evaluated precisely.

This gives rise to new business models, such as that of the British telematics insurer, insurethebox. The start-up company aims to show, in particular, that insurance premiums remain affordable even for inexperienced young drivers, provided that this target group’s individual driving behaviour is better than the norm.

The cars are fitted with a telematics box and the drivers collect bonus miles for defensive driving behaviour, which then count toward the agreed annual driving performance for the policy. The internet-savvy “Facebook generation” is the primary target group of insurethebox.

Perhaps the same can be said for the Mobiliz auto insurance policy, launched in April 2012 in Quebec by Industrial Alliance, Insurance and Financial Services Inc. The policy encourages young people to adopt more responsible driving behaviour through the use of rewards, notes a company statement.

Based on the pay-as-you-drive (PAYD) model, Mobiliz uses telematics technology to monitor distance travelled, speeding, forced acceleration and hard braking. When the program was introduced, the company reported that it would provide free installation of a GPS-type module to Quebec drivers between the ages of 16 to 24 who join.

And in Germany, certain insurers are testing another strategy in telematics-based insurance. A customer of ÖSA (Öffentliche Versicherungen Sachsen Anhalt), for example, can have a “crash sensor” installed in his or her vehicle by the insurer. The ÖSA Copilot is sold in addition to normal motor insurance and a monthly usage fee charged for the three-year term of the policy.

Copilot is essentially based on the introduction of eCall, a legislative initiative that by 2015 will require every new car in the European Union to have a small sensor that automatically triggers an emergency call in the event of a road accident.

The insurethebox and ÖSA products illustrate the distinction between a telematics-based tariff and a telematics- based insurance product: the former takes account of technical possibilities when structuring and calculating the tariff, while the latter affects the extent of loss incurred by the insurance customer.

QUESTIONS REMAIN

The possible applications for telematics-based insurance are numerous and the potential enormous, but its success for the insurance industry is difficult to assess. There are a number of crucial questions: Who collects which data and how? Who has access to that data? What advantages can policyholders gain from the telematics boxes? Are customers prepared to voluntarily hand over personal data about their driving behaviour? What can insurers offer in return? How low must telematics-based rates be to attract policyholders?

Telematics applications in the U.S. and the United Kingdom, in particular, have spurred insurers around the world to introduce such telematics-based rates as PAYD. However, it has yet to be demonstrated that telematics-based rates can, indeed, significantly and permanently change users’ driving habits and reduce loss potential.

The data provided by current pilot projects are often not sufficiently comprehensive to yield significant findings that can be applied to a complete portfolio. It may also be assumed that new telematics-based rates will primarily attract defensive drivers with lower mileage and related findings cannot simply be applied to all drivers in a portfolio by way of extrapolation.

In North America, telematics products generally involve a customer plugging a low-cost memory stick directly into the diagnostic interface of the vehicle. Driving data is collected on the memory stick, which is then available to calculate the renewal premium.

For example, Progressive provides a discount of as much as 30% with its Snapshot product if the stored data proves that the driver brakes defensively, drives fewer kilometres than the average driver in the state in question, and the car is rarely used either during peak commuter traffic times or between midnight and 4 am.

Other U.S. insurers, such as State Farm Insurance, rely on the use of smartph ones. The insurer offers an app with which policyholders can directly investigate their own driving behaviour, making telematics products more intelligible for the customer and making it easier to keep tabs on any developments when these are done via a smartphone. For the insurer, that means a growing target group.

The use of telematics enables the insurer to generate cost savings in the claims-settling process and at the same time, effectively work against insurance fraud by policyholders or third parties. With regular feedback and incentives, it is anticipated that customer loyalty to the insurer will also increase.