Personal auto carriers are quickly approaching a moment of truthwhen it comes to usage-based insurance programs where driver'sbehavior is monitored via a telematics device, claims a recentsurvey by Deloitte. Early adopters of UBI have gained a wealth ofexperience and insights that stand to provide a long-lastingcompetitive edge against insurers that have not followedtechnological trends.

Telematics trailblazers have been collecting massive amounts ofdata that can reveal driver behaviors, providing a basis forgreater precision in underwriting and pricing, but these earlyadopters still face many challenges in executing a viabletelematics program.

One of the main challenges is that widespread customeracceptance of these programs is far from certain, especially sincethere has been concern and skepticism regarding privacy, and somedrivers question how much they will be scrutinized. Half of thecurrent driving population, according to a 2014 survey by theDeloitte Center for Financial Services, is not open to the idea ofa UBI—at least in the current market.

Regulators, in general, have been supportive in the early stagesof telematics development, but future acceptance depends on aseries of factors, including impact on rates for those who fail tomeet with standards and higher rates for drivers who opt out ofbeing monitored. 

Deloitte's latest report, "Overcomingspeed bumps on the road to telematics: Challenges and opportunitiesfacing auto insurers," discusses the future of UBI products inthe market, how insurers can differentiate themselves withtelematics, gaining actionable insights, addressing oversightconcerns and next steps.

Click through the following slides to learn more aboutovercoming the challenges associated with telematics and howinsurers can differentiate themselves with the technology.

Navigating the obstacle course

Before integrating UBI into their product line, insurers mustconvince consumers that it is worth their while, which may be achallenge according to recent data that reveals that half of allcustomers are not ready for UBI.

Carriers need to convince customers that monitoring benefitsthem, and a way of attracting drivers to telematics monitoringprograms is to lure them with a lower premium charge. New UBIprograms often provide a discount based only on participation, notactual performance, and carriers collect critical mass data todetermine how to effectively leverage it for predictivemodeling.

Both the insurer and the customer would stand to benefit in thisinitial stage, as the consumer is incentivized by the discount,while the insurer gathers valuable information. As insurers buildlarge, statistically and actuarially credible UBI data sets, theprice cuts will eventually have to be translated into earneddiscounts based on actual driving experience.

Insurers may have to sacrifice some margin in the initial stagesof telematics, with discounts being part of the acquisition cost toenroll a new policyholder or gather additional data from a currentone. Over time, though, if the driver develops a relationship withthe insurer, and receives and heeds safety tips from the insurerbased on their monitored driving behavior, loss costs woulddecline, retention would increase and margins would improve.

At the same time, data gathered from telematics can helpinsurers improve segmentation, underwriting and pricing accuracy,which could also bolster profit margins.

In the early stages, first-movers have the opportunity toincrease their market share by offering discounted coverage, butonce the market reaches saturation, it is unlikely that UBIinsurers can grow their business by selling telematics based ondiscounts alone.

To boost retention and differentiate UBI offerings, Deloittebelieves carriers will likely have to offer more value-addedtelematics services. Insurers will reach a stage wherede-commoditizing the product is important, differentiatingthemselves from competitors.

Moving beyond a price focus

While a discounted premium may be enough to lure customersinitially, the development of a UBI program opens the door for anew level of customer engagement by creating a mutually beneficialcustomer experience that Deloitte calls this the "holy grail forinsurers."

According to Deloitte, this experience is created byestablishing a brand stickiness by offering ongoing value topolicyholders beyond the price charged for coverage and claimservices provided. In order to differentiate themselves withtelematics, UBI carriers can offer a variety of value-addedfeatures for customers. The survey provides the followingsuggestions:

• Provide immediate feedback on how customers could drive moresafely
• Alert drivers about potentially hazardous road conditions andtraffic slowdowns
• Facilitate roadside assistance and claims notification in theevent of an accident
• Locate lost or stolen vehicles
• Geo-fence to allow parents to monitor a teenage driver'slocation and driving behavior
• Monitor how "green" a driver is by measuring the impact oftheir driving behavior on their carbon footprint

Making insurance "fun" with telematics

Insurers can leverage telematics to foster customer loyaltyamong policy holders. Developing rewards for good or improveddriving behavior, relative to their own performance or theperformance of the broader policy holder pool, groups, orindividuals can make the application of telematics fun forcustomers. The experience becomes more interactive forpolicyholders and perhaps foster competition and gratification.

One major part of this process would be offering incentives forbehavior that prevents losses. This would make insurance moreproactive and prevention-driven, with the goal of creating valuefor the carrier and customer by encouraging loyalty, but also safedriving practices.

Incentives could potentially go beyond traditional benefits suchas lower deductibles and higher limits. Insurers could also givepolicyholders the option to redeem their points for auto repairs,car washes, detailing, gas discounts or other perks. Not only dothe loyalty points benefit the customers, but they could also helpthe insurer's retention value, as customers may be less likely toswitch if it means surrendering the loyalty points they haveearned.

Similarly, carriers can support the "fun" aspects of telematicsby making insurance a "game" for policyholders through telematicsmonitoring. A weekly or monthly driving competition, for example,offered among family members or friends insured by the same companywould encourage good driving behavior, but also could be anincentive for policyholders to refer friends to their carrier.

Overcoming privacy concerns

Despite some of the potential benefits of telematics monitoring,a potential source of resistance to widespread implementation is,of course, privacy. The notion of sharing so much personal drivingdata with insurers can be a concern for some policyholders, andmany are not comfortable with the idea of a virtual backseatdriver, monitoring their every move behind the wheel. Others may beconcerned about hackers.

Although there are naysayers fully against the concept ofmonitoring, there are some who do not oppose the idea of monitoringin theory, but fear data privacy breaches and cyber securitymeasures. Others are concerned that their data may be seized byother official channels, including law enforcement, seekingsomeone's driving history for criminal or civil actions.

These concerns may be alleviated by putting them into context,according to the Deloitte survey. By pointing out the othertechnologies that already monitor driving, including trafficcameras, it is clear that enhanced surveillance and geo-locationalcapabilities are already integrated into the present day, forbetter or worse.

On the whole, though, UBI carriers can emphasize the potentialadvantages to drivers that telematics offer, and stress how theproduct would be worthwhile for consumers, despite privacyconsideration. The Deloitte survey revealed that a significantsegment, especially among younger respondents, are open to tradingpersonal data for some sort of value proposition.

Deloitte suggests that gaining widespread acceptance andadoption of UBI programs will require insurers to engage inproactive communication and education with the consumer. Consumers,in particular, should be aware of the benefits of sharing theirpersonal driving habits. If the consumer stands to gain something,whether it is lower rates or rewards, and they believe their datais secure, he will be more likely to adopt telematics monitoring,despite any lingering concerns about personal privacy or cybersecurity.