Disruptive is a word tossed around a lot in the world ofinsurance technology, but it's difficult to argue with DeloitteConsulting's Steve Packard—and others—that the use of telematics tomake up what is known as usage-based insurance (UBI) fits thatdescription.

“Our point of view is [telematics] is a very disruptivetechnology that in some ways could revolutionize the way autopolicies are underwritten,” says Packard, a Deloitte director andauthor—along with John Lucker and Mark Hill—of the report“Telematics: Driving the automobile insurance market throughdisruption.”

At this point, Lucker, a Deloitte principal, believes mostinsurance carriers are thinking of telematics in thebehavioral-based aspect of the technology.

“Some of the early companies have been using [telematics] tovalidate traditional rating criteria, particularly miles driven,”says Lucker. “But where people are seeing the real potential is tounderstand some of the core behavior that intuitively is related todriving—good or bad—and using those data points that are availablein the [UBI] devices.”

Lucker is referring to data points such as hard braking, rapidacceleration, and the ability to correlate those with accidentdata. Insurers are doing an enormous amount of work to gather thisdata as well as trying to build large databases based on milesdriven and hours driven.

Although the data hasn't fleshed out anything definitive, Luckerbelieves some industry assumptions are going to prove true.

“If you measure the miles driven and rate drivers on actualmiles driven, companies are going to need to sort out what thatmeans to the top line,” he says.

Packard points out the current way in which automobile policiesare underwritten is done largely through a series of proxies.

“There are various characteristics associated with aperson—their age, gender, credit scores, and other things,” hesays. “It's not as accurate as usage-based products so peopledriving less or better than average drivers are probably paying abit more than poorer drivers.”

It works out fine if you are a preferred drive, points outPackard, and you get a discount, but a carrier can't discounteveryone, particularly in a highly competitive market.

“The industry is barely profitable on the auto side,” addsLucker.

The people who offer to use telematics devicestend to be good drivers who often overstate their miles driven,explains Lucker. People who round the mileage down are part of aleakage problem; people who round up their mileage create surpluspremium for the insurer.

“It's exposure that doesn't exist from the insurer'sperspective,” says Lucker. “That's been another conundrum in themix of issues. What does it mean if you actually begin to use thesedevices? Opportunities can emerge that can cause gross writtenpremium to decline.”

Some drivers will likely be bothered by what they see as aninfringement on their privacy, adds Lucker

“There is a belief that there is a desirable pocket of customersthat are completely disinterested in giving their data to aninsurer just so they can save $100 a year,” he says. “There's asignificant number that believe from a privacy perspective thatthey draw the line. They may be good drivers, but they don't wantto provide their data. It's important to better understand who thisgroup of customers is that is not participating in this technology.It's also important to consider human behavior—that people tend tobe over-confident in their abilities or their image. How many ofthe people who volunteer to try these devices prove to be baddrivers—the ones who would be typically avoided? Those are thethings that have to be sorted out through a study of the customersegment.”

Using the technology to create value is going to require deepthinking from insurers, points out Hill.

“You can't discount everyone, so you need to be sure you arealigning your pricing with the ultimate goals of the organization,”he says. “This is a tool that allows you to grow profitably; notjust grow.”

The amount of data taken in by insurers creates problems thatinsurers need to contend with, points out Lucker.

“One problem is when you are gathering more data and don't havean analytics plan well-articulated to what you want to do with allthe data,” he says. “These devices give you the ability to createsnapshots of driving at incredibly small intervals. You can captureat one second intervals or up to five seconds. So what is it youare trying to calculate or measure? If you believe calculating Gforces going around a curve is important to you then perhaps youneed some of that data and it needs to be stored. But if you aremore interested in other data points related to speed or geospatiallocation information, you don't need to capture the data asfrequently. Some companies aren't really sure what they want andwhat they need so they tend to save everything.”

Hill maintains there are several strategies that insurers canuse to fit telematics within an organization.

“If you are looking for fairly straightforward elimination ofpremium leakage and verification of mileage—kind of a low pricepoint of entry approach—you are going to collect far less data thanif you are thinking about small commercial where you are going toleverage GPS technology to keep track of your fleet,” he says. “Howbig a data challenge you have depends on the services you want tooffer and how it fits in your strategy.”

Progressive Insurance has stakedits claim on part of the technology market by asserting its patentsin court. Lucker reports Deloitte clients are trying to look forareas of opportunity within telematics that they believe are theleast controversial in regards to legal issues and patentissues.

While hesitant to remark on ongoing litigation, Lucker believesthere are some companies that are confident this will sort itselfout and they are full speed ahead.

“The industry is going to have to sort that issue out,” he says.“It doesn't mean that someone won't license the technology tosomeone else and create another revenue stream. One of the thingswe're hearing about mobile apps is insurance companies are notcompanies that have ramped up to sell or distribute the devices.For them to distribute expensive boxes that people have to installand go through the whole installation and recovery process issomething they are not set up to do. They are finding the mobileapplication to be interesting.”

Lucker believes there are a number of applications from Americanand UK insurers that people are watching and trying to learnfrom.

“What I'm finding is it seems to capture some of the mostgermane metrics that we hear our clients are interested in:geospatial, speed, acceleration, braking, and cornering,” he says.“Most insurers we've talked to have expressed that if they had toput together their first pass wish list those are the things theyfind important. The nice thing is the distribution method is wellestablished. There is no recovery opportunity; it just sits thereand it is a very low-cost option.”

Wireless communication eliminates hardware cost andsubstantially eliminates the data transmission costs, according toHill.

“If insurers have a dedicated device, they are paying for thedata to be transmitted from my car to the servers for storage,” hesays. “If you use a smartphone, the customer is bearing the bruntof the data transmission cost.

Data transmission and the hardware can be a substantial stickingpoint for an insurer, points out Hill.

“We talked to a client whose average monthly premium is in the$100 range,” he says. “If you talk about a device that is $50 or$75 plus data costs and costs for the infrastructure, on a $100premium you are talking about an additional expense point of two tofour points. That's why you have to pay attention to your businessmodel and how you are going to make money. I don't know any insurerthat can absorb two points to their expense ratio and notshudder.”

Packard believes the people who drive less often or are carefuldrivers will be the ones seeking telematics products so insurerswill be skimming the cream off a competitor's book of business.

“There's definitely an advantage to offering this product and adisadvantage for not doing it,” he says. “It's not simple; it needsto be thought through. How are you going to make money doingthis?”