It would seem as though the Personal Auto insuranceindustry has shifted into overdrive as large insurance companieslike Progressive, State Farm and Allstate are aggressivelypromoting their telematics programs and associated discounts toattract the best risks. Many of these large carriers have beendeveloping their telematics (or pay-as-you-drive) programs foryears.

For midsize carriers, competition to gain new customers—and moreimportantly, retain existing customers—in the Personal Autoinsurance market is heating up at an unprecedented pace. While somemidsize carriers may feel the pressure to implement telematicsinitiatives of their own just to keep up, many others are takingadvantage of new technology and creative solutions to combatadverse selection without actually putting telematics devices incustomers' cars.

Traditionally, Personal Auto policies have been priced based onsuch factors as age, gender, location, credit score and certainhistoric data. Robust predictive analytics allow carriers to refinetheir rate structure, pricing policies using more data than everbefore.

For insurers that decide to employ telematics, there are ways toreduce some of the costs involved. Smartphone applications with GPSare already in widespread use, and they can offer a less-expensivealternative to black-box technology but deliver similar datawithout investment in hardware. Smartphone applications combinedwith software-as-a-service-based predictive analytics technologyprovide another less-expensive option for midsize carriers.

Information such as the time of day, day of the week driven,location driven and speed—much of which is available through GPSand the smartphone—has proven to be the most predictive. Carriersare using this model to infer driving patterns from location-basedanalysis. GPS devices collect fewer low-value variables thantelematics devices do; there is less data to store andinterpret.

But for midsize insurers that often have limited resources,telematics is a complex and costly solution. Adopting telematics isa time-consuming process: It can take a year or more to implementand up to five years to see actual results.

Further, once telematics tools are  utilized, there areadditional challenges including transmitting, storing, scrubbingand analyzing the vast quantities of data collected—an area inwhich few insurers boast any expertise.

The continuous and ongoing nature of the data makes capture andstorage a difficult management problem. In addition, midsizeinsurers do not always have the resources to develop, test ormarket the numerous policy models that large insurance companiesdo. The amount of data to sort through makes it increasinglydifficult to figure out what's predictive and what's not.

And beyond the technology costs, there are also other potentialissues. Some customers who are very good risks may not want theblack box in their cars. And if this is the only way thosecustomers can get the best pricing, there can be a disconnect.Large carriers may view this as a cost of doing business. But formidsize carriers, where strong insured relationships are part oftheir brand, there is a risk of alienating drivers with aone-size-fits-all telematics program.

Midsize Personal Auto carriers are facing an increasinglycompetitive market—one that is likely to continue to changerapidly. While some may be feeling pressure to implementtelematics, there are other options to consider. In fact, manyleading players are using new technology and other solutions tomore accurately price their risks. These carriers are leveling theplaying field with large carriers that rely on discounts to attractthe best risks.

One thing is clear: The market is moving fast, and it isimportant for midsize carriers to develop plans now to combatadverse selection and move forward quickly.