Despite the far-reaching promise of telematics in insurance,fewer than two dozen carriers have managed to bring a telematicssolution to market in North America in either personal orcommercial auto.

However, there's evidence to suggest that telematics truly isthe iceberg of the insurance industry—with the bulk of activitygoing on under the surface. Celent reports that over 50 percent ofthe top UK and US insurers have a telematics insurance program inplace. A late 2012 report from Strategy Meets Action (SMA) puts thefigure even higher, with 70 percent of all auto insurers claimingto have “some” activity in the space.

Of course, what carriers define as activity makes all thedifference. “Seventy percent is a provocative number. It's gettingpeople to think. But the truth is most of those companies are inplanning mode,” says Mark Breading, partner, SMA.

Nevertheless, many insurers in SMA's survey believe that by2020, half of the auto market will in some way incorporatetelematics data, and insurers ignore that potential at their ownperil.

“Even if telematics takes just 10 percent of the market over thenext five years, opportunities for growth in the traditional autoinsurance market will shrink considerably,” claims Richard Welch,co-author of the SMA study. “If a company stays out of the[telematics] market and wants to grow its auto business, it willneed huge increases in market share in the traditional market. Itis imperative that carriers find a way to make telematics work forthem.”

Mid-Tier Malaise

Mid-tier carriers are faced with several challenges in deployinga telematics solution, and the first is cost. Most programs arestill based on “black box” hardware that needs to be plugged intothe ODB port in policyholders' vehicles. Although the cost perdevice has dropped from $400 a few years ago to less than $100today, the total price tag of a program still adds up.

“It's not just the hardware costs; it's the software, the dataenvironment, the wireless capability—it's a huge investment,” saysKimberly Harris-Ferrante, vice president and distinguished analyst,Gartner.

Welch believes there is a more significant cost-related obstaclethan hard-dollar program expenses. “Fear of patent infringementlawsuits around the actuarial process of using telematics iskeeping midsized companies out of the market more than the cost tobuild the program,” he explains.

Indeed, Progressive—a pioneer in telematics—has severallawsuits in progress against other carriers for allegedlyinfringing on its usage-based insurance (UBI) patents. However, inDecember 2012, Progressive released licensing terms for itspatents, offering a potential resolution to those suits and openingthe door to other carriers considering UBI programs. Progressive,which declined to comment on the lawsuits, reports it currently hasa licensing agreement with Allstate and is in active discussionswith several other insurers.

SMA believes Progressive's offer will appeal to insurers thathave not yet entered the UBI market, including small and mid-sizedauto insurers. “There is more clarity in the marketplace goingforward,” Breading says. Although carriers purchasing a licensecan't begin writing UBI until 2015, Breading believes that mostcarriers aren't in a position to offer programs before thenanyway.

Even if licensing and pricing issues are addressed, carriers arefaced with other obstacles, including data. “Data has presented abig challenge because telematics produces so much of it. We haveonly started to exploit its benefits,” says Parm Evans,spokesperson for UK-based insurethebox, which offers only UBIproducts.

“We have to store all that data, summarize it efficiently, dothe math to calculate the scores and discounts. We have to planahead to be sure we have enough storage and processingcapabilities,” says David Pratt, general manager of UBI atProgressive. “So far we've been able to stay ahead of that[demand].”

Data volumes are a particular concern for telematics devicesthat record GPS and other location-based information. “The updatedGPS points that are recorded as you go through a journey create amassive amount of data. While storage is cheap, telematics datapushes the edge of how much data is useful,” says CatherineStagg-Macey, senior vice president of Celent's Insurance Group inEurope.

In setting up a telematics program, carriersdo need large amounts of data that correlate with claims experienceto support predictive analytics that reward certain types ofdriving activity and punish others. “Within the data set, you needenough accidents and claims to know how people are behaving. If youhave only 5,000 policies, you're not going to get enough data abouthow that [driving] impacts claims costs,” Stagg-Macey says.

Welch, however, believes that the situation for midsizedcarriers is not dire. “It's true that the big players are makinglarge investments, but they don't have large numbers of customersyet,” he observes. “There is plenty of room for midsized companiesto innovate.”

Also encouraging for smaller carriers, telematics vendors arecontinuing to build out their end-to-end solutions to provide notjust hardware, connectivity, and data, but insurance-specificanalytics and driver behavior scoring. Service-based options arealso becoming available to insurers who want to pay-as-they-go tooffer a pay-as-you-drive solution.

Octo Telematics offers an end-to-end solution based exclusivelyon a service model. Insurers can pay either a fixed contract costor a monthly fee, which covers a ODB device, telecommunications,and data. “Some insurers have their own analytic teams and want rawusage data. In other cases we process the data against our internalscoring mechanisms, and in other cases we send the data to athird-party partner of the insurer at their request,” says NinoTarantino, CEO of Octo Telematics North America.

Canadian vendor Intelligent Mechatronic Systems (IMS)offers two different deployment models for its DriveSync M2M(machine to machine) telematics platform. Insurers can purchase ODBdevices, which require a monthly network fee that can be reduced byutilizing smartphone wireless sharing capabilities ofpolicyholders' smartphones. IMS also offers telematics as a service(TaaS), allowing insurers to pay a monthly subscription fee fordevices and services.

Octo Telematics has devices installed in over 1.7 millionvehicles worldwide, with US insurance customers ranging in sizefrom multi-state carrier Safeco to Hawaii-domiciled DTRIC. IMS haseight North American insurance customers, not all of which havedeployed programs to market. One pilot is currently using the TaaSfinancing model, and one live program is moving to TaaS.

“2013 is a tipping-point year, and by 2014 you'll see a largenumber of players,” predicts Blair Currie, IMS vice president ofmarketing. “New deployment models will also continue to emerge thathelp midsize carriers get into the market.”

Following the Pioneers

Just because midsized carriers choose to wait on telematicsdoesn't mean they should be passive.

“Companies need to make a conscious decision to license[Progressive's patent] or not based on their market andcompetiveness,” Breading says. “They need to put togetherstrategies and plans for how it affects their business and who topartner with, realizing that their competitors are going to beusing telematics to go after preferred segments.”

Midsized carriers should also be exploring what other carriershave done. Progressive has gone all-in on usage based insurancewith its Snapshot program. Currently, more than 1 million ofProgressive's nearly 9 million policyholders in 45 states utilizeSnapshot, accounting for more than 6 billion miles of data inProgressive's database.

The program was originally introduced as “Tripsense” in 2004 andrequired an OBD device that the policyholder would removeperiodically in order to upload data to Progressive. Wirelesscapability was introduced in 2008, allowing the device to remain inthe car while transmitting data. Data sent includes how the car isdriven, how far, and how often, but does not include GPS orlocation data.

Progressive covers the expense of Snapshot devices, but lowersits total program costs by requiring only a 6-month installation ofthe device in the vehicle. After that time, customers are presentedwith a range from no discount to a 30 percent savings based ontheir driving habits and can decide whether or not to continue withthe program. Nearly one-third of drivers at least give the device atry.

“About two-thirds who opt in to the program get a discount, andwe see some evidence that people who opt in are able to improvetheir driving and drive more safely,” Pratt says. The averageSnapshot discount is about $150 annually. Pratt points out thatProgressive recovers the expense of the Snapshot device byattracting the best drivers to the program and by drivers' activelyworking to improve and gain a greater discount.

Other carriers have taken different approaches. Some havetargeted specific segments of customers: Safeco offers a 15 percentteen safe driver discount; American Family provides concernedparents an ODB device in its teen safe driving program to monitorfor erratic driving and accidents.

State Farm uses data from OEM-installed telematics services,such as GM's OnStar and Ford's SYNC system, in its Drive Safe &Save discount program, which offers customers a 5 percentdiscount for signing up and additional discounts based on drivingbehavior. Customers who don't subscribe to either of those servicescan obtain a plug-in device from In-Drive by contacting theiragent. The program was introduced in 2011 and is expected to beavailable in most states by the end of April.

In commercial auto, telematics has found a foothold as a safetytool, rather than a pricing mechanism. “Commercial is muchdifferent in that companies are deploying telematics for fleetmanagement, and the insurance benefit is an afterthought,” Welchsays.

For instance, Liberty Mutual offers its Onboard Advisor programto policyholders and non-policyholders alike. Geared toward fleetswith fewer than 1,000 employees, Onboard Advisor uses one ofseveral manufacturers' devices to record location data along withdriver performance, such as braking, acceleration, and cornering.Fleets and drivers can review safety scores at the Onboard Advisoronline dashboard. A device is free for a two-year trial and costs$8 per month thereafter (waived for Liberty Mutual customers).

Whether personal or commercial, carriers seek similar benefitsbeyond pricing. “Telematics has the potential to provide real-timefeedback to drivers across the spectrum. It can help retentionthrough value-added services. It can result in better driverbehavior so that losses go down,” says Welch.

Currie believes that insurers in both personal and commerciallines need to look beyond price to find the true value oftelematics. “Companies need to break out of the price spiral, whichis a race to the bottom,” he says. “Using telematics to appeal tospecific customer segments, to keep drivers safe, or to createdifferent types of insurance products—that's where the realinnovation will occur and how midsized carriers can leveragetelematics to differentiate themselves.”

Even price-focused Progressive sees the far-reaching benefits oftelematics. “To the extent people drive more safely, there's a realbenefit to society,” Pratt says. “That makes me feel good aboutcoming to work.”

Smartphones to the Rescue

UBI programs in the US have revolved almost exclusively aroundthe black box, taking a retrospective look at driving and using itto adjust rating. Other approaches, such as pre-pay by the mile,haven't gained traction. For instance, Texas insurer Milemeter,featured in a 2009 TechDecisions article, closed its doorsafter just four years in operation.

But there are other options for providing driving behavior data.Smartphones may be a viable alternative for cost-conscious midsizedcarriers because many customers already have the devices, althoughthere are some inherent limitations.

“The biggest challenge is getting a complete driving picture,”Welch says. “If you have a black box device, it's typically pluggedin, so it captures how you're driving every mile. With smartphones,drivers have to bring it with them, have it turned on, and have theapp activated. It requires more customer involvement.”

Ireland broker Autoline Insurance Group introduced asmartphone-based Road Safety Rewards program in 2012. The programallows customers to download an app for Android, iPhone orBlackberry devices.

“We began by looking at the black box, but being a broker, it'salmost impossible to stock up [on devices] financially. So westarted looking at the phone app,” explains Caroline Currie, salesdirector, Autoline Insurance Group.

Autoline provides customers a cellphone charger to address thebattery-draining nature of the application, as well as adash-mounted cradle to improve GPS reception. The app, developedfor Autoline by telematics vendor MyDrive Solutions, records GPScoordinates, trip date and time, acceleration and deceleration, andG-rating to measure cornering.

Autoline addresses the shortcomings of smartphone datacollection by comparing miles driven to miles reported on theinitial application. MyDrive is also developing a “Roadsense”feature that will use GPS data to track where the last trip endedand next trip began to ensure there is no unrealistic gap.

Location-based data—a privacy concern for many customers—wasaddressed by Autoline in its app development. “We as a broker don'tlook at where they've been driving,” Currie explains. “We only geta score, which is less about where customers have been driving andmore about what type of roads they've been on and how they areperforming on those roads.”

In the first 250 miles of driving, a new policyholder is awardeda score from one to five, which is available for review at theAutoline customer portal. After that distance, drivers are thenscored on a scale of 1 to 100, with higher scores being better.Drivers can also use the portal to contact a driving coach fromIreland's Royal Society for Prevention of Accidents (RoSPA).

Autoline's carriers are willing to discount their rates anywherefrom 20 to 50 percent just for signing up for the program. Youngerdrivers tend to receive higher initial discounts.

“Insurers recognize that this product is going to beparticularly attractive to young drivers. In many cases, this is anarea of the market that they don't currently write any business in,so their [base] rates are particularly high,” Currie says. “Ourtelematics customers are by nature more responsible drivers who arehappy to have their driving scored, be coached to drive better, andget further discounts. Parental involvement is generally huge, andoverall they are a better risk. This warrants an initialdiscount.”

Drivers then earn anywhere from a 10 percent additional premiumdiscount to a 5 percent premium surcharge based on their drivingscore. Customers also agree that if they have an accident and theapp is not running at the time, they will be assessed a£1,000-pound claim surcharge.

Autoline has seen the benefits of the program. “It's raised ourprofile as a broker, and there has been a great deal of interestfrom customers. A lot of interest comes from parents who buy theirchildren a car and want to be sure they are safe on the road,”Currie says, adding that it's not uncommon for customers to work toimprove their driving score by 10 points or more to obtain agreater discount.

Frederic Bruneteau, managing director of PTOLEMUS ConsultingGroup, says that an approach such as Autoline has taken is a goodcompromise in a smartphone-based telematics program.

“The smartphone is not as good as the black box, but you will bemuch better at estimating the risk [by using it],” he says. “I callit pragmatic. It's accepting the level of data and correctness weget from a smartphone, which is not as comprehensive. The advantageis it costs you nothing—all you need is a customer's phone.”

Other Lessons from Across thePond

U.S. insurers can look to other examples from the UK whendeveloping their own strategy. UK insurers do deal with differentmarket factors influencing the use of telematics, the mostsignificant of which is a European directive which mandates theinstallation of emergency call devices in all new passengervehicles stating in 2014.

Although there is no such mandate in the U.S., car manufacturershere are building in more devices and features that turn cars intomobile computers. “There is likely to be a lot of development inthis arena, and most in the industry believe that over timetelematics data will be provided directly by the vehicles,” saysWelch. “However, because of the fact that this will happen over aperiod of years and only in new cars, it will take a long timebefore the majority of cars in the U.S. fleet are so equipped.”

Additionally, the UK auto insurance market is contending with aEuropean Court of Justice order that prohibits using gender as afactor in establishing auto insurance premiums, maintaining thatdoing so violates discrimination laws.

“Before the gender ruling, you could see differences of£500 pounds between a young woman and man. There was avalid reason for that, so today there is a very strong pricingopportunity to use telematics to understand what kind of driver youhave” using gender-neutral criteria, Bruneteau says.

In January, insurethebox launched its “Drive Like a Girl”program in direct response to the EU gender directive. “Fordecades, the insurance industry has known young females are muchsafer drivers than their male equivalent of the same age,particularly in the 17 -25 age bracket. Therefore, Drive Like aGirl was launched to target those young females who have no way ofshowing they are a safe driver,” Evans says.

The program is actually not gender-based and is open to anyonewho can demonstrate they “drive like a girl.” The program operatessimilarly to insurethebox's primary offering and uses the sameblack box at no charge to the customer. Discounts can reach 18percent after three months of “girl-like” driving.

“The product has had a great response since its launch less thana month ago by both young men and women,” Evans says. “Sales havebeen higher than anticipated in our original business plan.”

Companywide, insurethebox has sold over 170,000 policies sinceits launch in June 2010. Evans says that there was some initialresistance to the “big brother” aspects of telematics among youngerdrivers, but this is less of an issue now that people havebecome used to the idea of box technology and understand itsbenefits.

“Already it has helped us to underwrite more accurately andgiven us a much better understanding of customers than would bepossible with conventional insurance. The customer benefit—help intracing stolen cars, rapid response to accidents using our alertsystem—has been as expected. We are delighted that our data showsthat the incentives we offer really do reduce accidents,” Evansexplains.

Watch and Wait

Even though most midsized carriers are playing a wait-and-seegame, they aren't at serious risk of falling behind in thetelematics marketplace—at least not yet.

“Right now the pioneers are learning and paying the premium ofhigh costs to device manufacturers, systems integrators, andothers. As telematics becomes more widespread, and cost and otherconcerns become less of an issue, I think there will be a point atwhich there will be a critical mass, and there will be a real rushto the marketplace,” Breading says. “Any way you look at it, itwill have a big impact on business.”