With usage-based programs still relatively new to the autoinsurance industry, it would be understandable if some carrierswere wondering what the return on investment might be when it comesto telematics.

Indeed, insurers might be tempted to repeat the catchphrasecoined by the lead character in the 1996 movie “Jerry Maguire,”featuring a high-profile sports agent whose mantra was: “Show methe money!”

So, what ROI should insurers expect on usage-based insurance(UBI), in which auto carriers monitor the driving performance ofparticipating policyholders via a telematics device installed intheir vehicles—or, more likely before long, through an appdownloaded onto their smartphones?

This question is particularly pressing during the introductorystage of UBI, in which many early adopters have been offeringpremium discounts to those drivers who agree to test drive atelematics-based coverage option.

For the moment, most carriers may have insufficient data to sayfor sure what the ROI on UBI will be when all is said and done. Weare still in the exploratory stage, as individual insurers andthird parties collect a critical mass of actual driving data,analyze it, correlate it to the likelihood of a loss, and leveragethat information for more precise underwriting, segmentation, andpricing decisions.

However, that's not to say that auto insurers thinking aboutentering the telematics market are driving in the dark withoutheadlights. To the contrary, there are already some clear benefitsfor carriers to consider both in terms of increased revenue andlower expenses that could indeed have a big impact on an insurer'sbottom line right away.

For example, when it comes to enhanced revenue opportunities,consider the following:

• Risk-tiering: UBI carriers will have morefirst-hand data on driver behavior, facilitating improved risksegmentation. They should be better able to identify high-riskdrivers and adjust premiums to reflect actual performance behindthe wheel.
• Product innovation: Insurers could employtelematics to unearth new potential target markets by analyzingdriver behavior. They could also create new products tailored tomicro-segments, and increase the breadth of product offeringsavailable to their agents.
• Marketing and service enhancements: Carrierscould leverage UBI to offer more value-added services, such asautomatic emergency response and parental monitoring capabilities.They could create new cross-selling opportunities for existingproduct lines, and perhaps develop targeted external partnershipsto offer related coverage and services, especially when drivers aremonitored over a mobile app.
• Higher retention potential: By setting up atelematics connection via a driver's smartphone, insurers canincrease customer engagement by creating a direct, two-way dialoguewith policyholders that goes beyond routine interactions for claimsand renewals. They could bolster brand loyalty by rewarding safedriving behavior, and perhaps employ gamification to enhance thevalue of a UBI policy.

Meanwhile, auto carriers could reduce their expenses with UBIby:

• Lowering loss costs and loss-adjustmentexpenses: Insurers could use telematics data for moretimely first notice of loss during the claims process. They couldalso reduce the volume of claims processed by promptingpolicyholders who know they are being monitored to drive moresafely, as well as by offering safe driving discounts to those whoare more careful behind the wheel.
• Decreasing acquisition costs: UBI carriers maybe better positioned to win over good drivers from rival carriersthat do not offer a telematics option.

Over the short term, UBI carriers might have to absorb someupfront investments to launch a telematics program and foster itsinitial growth. The old axiom that one has to spend money to makemoney extends to telematics as well. But as insurers gather moredata and develop advanced analytics to connect the dots, theyshould be able to more accurately predict loss potential and pricerisks with greater confidence, thus improving their bottomline.

In addition, while the long-term impact on ROI is difficult topredict, watching and waiting or sitting out the UBI trend entirelymay also have its costs. Non-adoption could undermine profitabilityfor carriers if it means seeing their best drivers cherry-picked byrival insurance companies offering lower premiums for signing upwith a UBI program, and retaining those customers with enhanced,telematics-based services.

For more information about telematics, including a recap ofDeloitte's consumer research into the market and operationalconsiderations for UBI, see “OvercomingSpeed Bumps on the Road to Telematics.”