In exchange for personalized data, insurance companies are now offering consumers lower premiums based on their actual habits instead of educated guesses derived from population statistics.
The use of these data-collection devices, called telematics, is part of the Internet of Things, and it is the future of insurance. In the near future, telematics will change everything about how insurance companies evaluate risk and communicate with customers.
Risk and reward
Data is the lifeblood of the insurance industry.
Without good data, actuaries and underwriters can’t charge accurate premiums for prospective insureds. Some of this data is relatively straightforward, such as life expectancy factors and driving risks, but all of it depends on people other than the actual insured. Telematics promises to consider the individual, rather than the group, to provide better premiums for more customers.
Telematics gives potential customers the opportunity to distinguish themselves from the crowd.
Homeowners, for example, know it can be dangerous to have a wood-burning fireplace. Fires are risky — no matter the cause — and to mitigate that risk, insurance companies charge higher premiums to people who live in houses with those fireplaces.
Telematics, however, depends on individual homeowners. If you live in a city with a lot of cold weather, but you barely use your fireplace, telematics can read that information and lower your premium. This way, you don’t pay the same amount as your s’mores-loving neighbor.
For auto insurance, State Farm’s In-Drive measures key variables such as miles driven, acceleration, braking, turns, high speeds and time of day to reassess risks and reprice premiums every month. It also gives parents and guardians access to their teens’ driving behaviors so they can better protect their young drivers (who are nearly three times more likely to die in a car crash than people 20 and older).
Now imagine that telematics extends several times beyond their current capabilities, and you’ll start to get a sense of how these devices and the Internet of Things will change the insurance landscape.
Future of insurance
Telematics will transform insurance from a fixed-cost operation into a variable-cost one.
Current technologies such as Snapshot and In-Drive provide personal rates based on an individual’s data, but they still provide static rates. As the technology improves, we will start to see more variables affect insurance rates, potentially providing different charges based on usage — similar to how power companies operate.
For auto insurance, we can measure driving habits and study typical weather patterns, but the data collection is still relatively primitive. More-advanced technology and widespread adoption will allow us to shift to a cost-per-mile model, incorporating real-time weather, congestion and time-of-day data to give a value to each mile and provide a truly accurate risk assessment for every driver on every trip.
Telematics will change mechanical insurance as well.
Right now, the industry rewards insureds who practice good maintenance habits and follow commissioning standards, but companies don’t know much about the equipment they insure until the customer reports maintenance.
Eventually, the ability to consistently report will give lower premiums to everyone automatically — and penalize those who don’t practice good maintenance. This gives lower premiums than today’s model, in which everyone pays higher prices because insurance companies can’t track who’s really taking care of their equipment.
Similarly, home insurance companies are now working with Internet of Thing companies, such as Nest, to ensure security systems are working, contact fire departments when needed, and reduce insurance premiums all around.
And some health insurers have already begun using wearable technology and fitness incentives to help their customers pay less for insurance. The insureds get fitter and pay less, while the insurance companies get a healthier pool of customers and, therefore, reduce their total risk.
Both the people and their insurance companies save money, so everyone wins.
What will insurance look like 10, 20 or even 50 years from now? It’s hard to know exactly, but we do know that the more real-time data individuals can provide to insurance companies, the more personalized, lower premiums they will receive.