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

“Our point of view is [telematics] is a very disruptive technology that in some ways could revolutionize the way auto policies are underwritten,” says Packard, a Deloitte director and author—along with John Lucker and Mark Hill—of the report “Telematics: Driving the automobile insurance market through disruption.”

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

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

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

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

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

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

“There are various characteristics associated with a person—their age, gender, credit scores, and other things,” he says. “It's not as accurate as usage-based products so people driving less or better than average drivers are probably paying a bit more than poorer drivers.”

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

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

The people who offer to use telematics devices tend to be good drivers who often overstate their miles driven, explains Lucker. People who round the mileage down are part of a leakage problem; people who round up their mileage create surplus premium for the insurer.

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

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

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

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

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

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

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

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

“If you are looking for fairly straightforward elimination of premium leakage and verification of mileage—kind of a low price point of entry approach—you are going to collect far less data than if you are thinking about small commercial where you are going to leverage GPS technology to keep track of your fleet,” he says. “How big a data challenge you have depends on the services you want to offer and how it fits in your strategy.”

Progressive Insurance has staked its claim on part of the technology market by asserting its patents in court. Lucker reports Deloitte clients are trying to look for areas of opportunity within telematics that they believe are the least controversial in regards to legal issues and patent issues.

While hesitant to remark on ongoing litigation, Lucker believes there are some companies that are confident this will sort itself out 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 to someone else and create another revenue stream. One of the things we're hearing about mobile apps is insurance companies are not companies that have ramped up to sell or distribute the devices. For them to distribute expensive boxes that people have to install and go through the whole installation and recovery process is something they are not set up to do. They are finding the mobile application to be interesting.”

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

“What I'm finding is it seems to capture some of the most germane 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 to put together their first pass wish list those are the things they find important. The nice thing is the distribution method is well established. There is no recovery opportunity; it just sits there and it is a very low-cost option.”

Wireless communication eliminates hardware cost and substantially eliminates the data transmission costs, according to Hill.

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

Data transmission and the hardware can be a substantial sticking point 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 $100 premium you are talking about an additional expense point of two to four points. That's why you have to pay attention to your business model and how you are going to make money. I don't know any insurer that can absorb two points to their expense ratio and not shudder.”

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

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

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