The benefits of telematics-based auto-insurance products could go beyond better risk selection and pricing—and could include better fraud detection and the ability to provide feedback to consumers on CO2 emissions, fuel consumption and other factors that may lower the cost of driving, a new Celent report says.
In “Telematics-Based Insurance: Has Its Time Finally Arrived?” Celent says insurers are overcoming historic obstacles by employing telematics, or usage-based insurance products.
Celent says the cost of devices, installation and servicing has declined and will continue to fall. The task of transferring data from devices to the insurer has also become easier, as data sent via the 3G network means consumers no longer have to transfer the data themselves to a computer and then send it to the insurer.
Even privacy concerns have eased, Celent claims. “Customers’ data-privacy concerns appear to be allayed by the chance of cheaper premiums,” the report notes. It cites a Towers Watson survey that found nearly two-thirds of U.S. drivers would be willing to alter their driving behavior to achieve a 10 percent insurance discount. Of those drivers, 76 percent would allow a device in their vehicle to monitor behavior.
As the obstacles are overcome, telematics programs will grow, Celent says. In line with comments made last month by Moody’s, Celent says insurers that do not offer such products will “find themselves insuring shrinking pools of poorer drivers—who will appear to be normal drivers if traditional rating factors are used.”
Celent says insurers’ benefits, however, will go beyond being able to more accurately price risks. “Claims-improvement opportunities include improving fraud detection, for example, by using accelerometer readings to gauge the G-force during impacts and settle whiplash claims more accurately; and reducing lead time between accidents and first notice of loss, which increases the likelihood of achieving a speedy and fair settlement before the involvement of third parties,” the report says.
Celent adds that location data can also help “sniff out fraud gangs.”
Insurers can also provide insight on what is happening with the vehicle itself, with respect to CO2 emissions and fuel consumption. “This data can be fed back through the customer portal to support decisions around lowering the cost of driving,” says Celent.
“Insurers can use telematics to directly influence how policyholders drive,” the report states. “At a minimum, [insurers] benefit from the phenomenon in which merely knowing that a device has been installed leads some drivers to moderate their speed and brake more safely.”
At the extreme, Celent adds, “insurers can actively improve driving habits by providing ongoing feedback based on telematics data.”
The “next evolution” of telematics-based products, the report says, will be to use the devices to gather a wider array of data—and to gather enough data in the aggregate—so that premiums are truly correlated to individual driving behavior. “The enhanced version of pay how you drive uses telematics data to provide feedback to the policyholder about how they drive, with the intention of improving their driving.”
“In my opinion, 2011 has served as the tipping point for telematics and usage-based insurance,” says Robin Harbage, director of usage-based insurance for Towers Watson, commenting on where he sees telematics-based products today compared to years past. “Until now, a few key players were pushing quite hard. Today, almost all major players have a public program or internal pilots.”
While he notes its widespread use is “less mature,” Harbage says that is not hindering regulatory acceptance of the concept.
“Regulators almost bend over backward to help insurers as long as insurers have provisions to be very transparent to policyholders about data privacy, what they’re collecting and how they’re using it,” he says, adding that the warm reception from regulators occurs because telematics replaces proxy variables with data that actually shows why losses occur.
Harbage says the biggest challenge is use of data: “Because this is so new, insurers don’t know exactly what information they should collect. It’s not as simple as plugging something in and capturing data. The devices can record quite a bit of data; frequency, accuracy and validity can vary. Think about the end result. What do you want to do with the data?”