Telematics’ time is coming
Telematics rating is inevitable and will become a standard product offer of many insurers in the next five years according to EMB.Telematics provides too many pricing and marketing advantages to be consigned to the fringes of the market for much longer, the company claims.
“The missing piece of the jigsaw is an innovative marketing approach that will connect with the millions of drivers that will benefit from telematics,” says EMB Director, Julian Beardsworth. “A successful telematics insurance implementation will deliver unprecedented advantages in the motor insurance market, resulting in worldwide interest and revenue potential.”
The insurance industry would stand to benefit from knowledge such as the fact that UK Government Road Casualties Great Britain 2007 showed an 80% lower accident risk per mile on motorways.
There are already numerous examples of usage-based initiatives across the world – in Canada, Japan, Israel and South Africa. In Europe, Italy is the furthest ahead with an estimated 50,000 insured vehicles, while in the UK the “pausing” of the Norwich Union Pay as you Drive™ programme has not deterred four insurers from subsequently signing up to the Coverbox panel.
But only in the US is telematics showing signs of making it to the mass market where Progressive has recently announced a countrywide rollout program for MyRate, subject to regulatory approval, after successful pilots of various technologies in eight states.
Some commentators have questioned the ‘big brother’ effect of installing GPS tracking systems in cars to feed back to data centres, which has been seen as the most obvious way of implementing a telematics-based insurance product. But there is little evidence that consumers feel strongly about this point since the trials to date have indicated a high degree of trust in insurance companies to handle the accumulated data. Furthermore, no-one will be forced to buy usage-based cover.
In any case, a scaled down telematics technology approach is likely to be the most cost effective for insurers. This will actually move beyond location-based data and focus on driving behaviours such as acceleration, braking and lateral forces using a vehicle’s on-board diagnostic port (OBD), which all help build up a richer picture of individual driver risk.
The obstacles to a successful mass market telematics offering are diminishing all the time. The economics of the technology has been a particular issue in the past but costs of geographic positioning systems (GPS) and data transfer have fallen significantly in a short space of time. For example, transferring 1MB of data, which may have cost £1 less than five years ago, has fallen in price to around two pence thanks to the wide availability and uptake of broadband and related technologies.
From a governmental point of view, telematics supports a number of key areas of public policy in many parts of the world, such as reducing road use, lowering pollution, minimising road casualties, and improving emergency response in the event of an accident.
“The insurance industry has to find a way to make this work as the level of price competition in motor insurance will make it difficult to write profitable business for some time to come. The technology is largely in place and the business case is pretty clear from where we sit as pricing experts, despite distinct geographic variations and business drivers. It’s a case of communicating the fact that drivers can directly control the amount of insurance they pay,” says Beardsworth.
From the insurers’ point of view, two other factors should work in favour of usage-based solutions. The experience from initiatives to date is that consumers who are attracted to a usage-based product tend to be low risk, perhaps not surprising for people volunteering to be closely monitored. And the very fact that they are being observed further influences the driver to reduce risk.
“The company that clears the remaining hurdles first will undoubtedly steal a competitive march and grasp the opportunity to decommoditise a segment of the market,” notes Beardsworth. During Norwich Union’s Pay as you Drive™ pilot, it stated that claims reduced by 30% and retention rates were over 90%. “This is the sort of performance that the mainstream motor insurance market can only dream about.”
For further information on how we could assist you with your plans for telematics, please visit our telematics homepage or for further insight into the world of telematics read our briefing paper
Julian.Beardsworth@emb.com