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

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

Of course, what carriers define as activity makes all the difference. "Seventy percent is a provocative number. It's getting people to think. But the truth is most of those companies are in planning mode," says Mark Breading, partner, SMA.

Nevertheless, many insurers in SMA's survey believe that by 2020, half of the auto market will in some way incorporate telematics data, and insurers ignore that potential at their own peril.

"Even if telematics takes just 10 percent of the market over the next five years, opportunities for growth in the traditional auto insurance 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 will need huge increases in market share in the traditional market. It is imperative that carriers find a way to make telematics work for them."

Mid-Tier Malaise

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

"It's not just the hardware costs; it's the software, the data environment, the wireless capability—it's a huge investment," says Kimberly Harris-Ferrante, vice president and distinguished analyst, Gartner.

Welch believes there is a more significant cost-related obstacle than hard-dollar program expenses. "Fear of patent infringement lawsuits around the actuarial process of using telematics is keeping midsized companies out of the market more than the cost to build the program," he explains.

Indeed, Progressive—a pioneer in telematics—has several lawsuits in progress against other carriers for allegedly infringing on its usage-based insurance (UBI) patents. However, in December 2012, Progressive released licensing terms for its patents (see sidebar), offering a potential resolution to those suits and opening the door to other carriers considering UBI programs. Progressive, which declined to comment on the lawsuits, reports it currently has a licensing agreement with Allstate and is in active discussions with several other insurers.

SMA believes Progressive's offer will appeal to insurers that have not yet entered the UBI market, including small and mid-sized auto insurers. "There is more clarity in the marketplace going forward," Breading says. Although carriers purchasing a license can't begin writing UBI until 2015, Breading believes that most carriers aren't in a position to offer programs before then anyway.

Even if licensing and pricing issues are addressed, carriers are faced with other obstacles, including data. "Data has presented a big challenge because telematics produces so much of it. We have only started to exploit its benefits," says Parm Evans, spokesperson for UK-based insurethebox, which offers only UBI products.

"We have to store all that data, summarize it efficiently, do the math to calculate the scores and discounts. We have to plan ahead to be sure we have enough storage and processing capabilities," says David Pratt, general manager of UBI at Progressive. "So far we've been able to stay ahead of that [demand]."

Data volumes are a particular concern for telematics devices that record GPS and other location-based information. "The updated GPS points that are recorded as you go through a journey create a massive amount of data. While storage is cheap, telematics data pushes the edge of how much data is useful," says Catherine Stagg-Macey, senior vice president of Celent's Insurance Group in Europe.

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

Welch, however, believes that the situation for midsized carriers is not dire. "It's true that the big players are making large investments, but they don't have large numbers of customers yet," he observes. "There is plenty of room for midsized companies to innovate."

Also encouraging for smaller carriers, telematics vendors are continuing to build out their end-to-end solutions to provide not just hardware, connectivity, and data, but insurance-specific analytics and driver behavior scoring. Service-based options are also becoming available to insurers who want to pay-as-they-go to offer a pay-as-you-drive solution.

Octo Telematics offers an end-to-end solution based exclusively on a service model. Insurers can pay either a fixed contract cost or a monthly fee, which covers an ODB device, telecommunications, and data. "Some insurers have their own analytic teams and want raw usage data. In other cases we process the data against our internal scoring mechanisms, and in other cases we send the data to a third-party partner of the insurer at their request," says Nino Tarantino, 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 ODB devices, which require a monthly network fee that can be reduced by utilizing smartphone wireless sharing capabilities of policyholders' smartphones. IMS also offers telematics as a service (TaaS), allowing insurers to pay a monthly subscription fee for devices and services.

Octo Telematics has devices installed in over 1.7 million vehicles worldwide, with US insurance customers ranging in size from multi-state carrier Safeco to Hawaii-domiciled DTRIC. IMS has eight North American insurance customers, not all of which have deployed programs to market. One pilot is currently using the TaaS financing model, and one live program is moving to TaaS.

"2013 is a tipping-point year, and by 2014 you'll see a large number of players," predicts Blair Currie, IMS vice president of marketing. "New deployment models will also continue to emerge that help midsize carriers get into the market."

Following the Pioneers

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

"Companies need to make a conscious decision to license [Progressive's patent] or not based on their market and competiveness," Breading says. "They need to put together strategies and plans for how it affects their business and who to partner with, realizing that their competitors are going to be using telematics to go after preferred segments."

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

The program was originally introduced as "Tripsense" in 2004 and required an OBD device that the policyholder would remove periodically in order to upload data to Progressive. Wireless capability was introduced in 2008, allowing the device to remain in the car while transmitting data. Data sent includes how the car is driven, how far, and how often, but does not include GPS or location data.

Progressive covers the expense of the Snapshot devices, it offers customers, but the insurer lowers its total program costs by requiring only a six-month installation of the device in the vehicle. After that time, customers are presented with a range from no discount to a 30 percent savings based on their driving habits and can decide whether or not to continue with the program. Nearly one-third of drivers at least give the device a try.

"About two-thirds who opt in to the program get a discount, and we see some evidence that people who opt in are able to improve their driving and drive more safely," Pratt says. The average Snapshot discount is about $150 annually. Pratt points out that Progressive recovers the expense of the Snapshot device by attracting the best drivers to the program and by drivers' actively working to improve and gain a greater discount.

Other carriers have taken different approaches. Some have targeted specific segments of customers: Safeco offers a 15 percent teen safe driver discount; American Family provides concerned parents an ODB device in its teen safe-driving program to monitor for 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 and Save discount program, which offers customers a 5 percent discount for signing up and additional discounts based on driving behavior. Customers who don't subscribe to either of those services can obtain a plug-in device from In-Drive by contacting their agent. The program was introduced in 2011 and is expected to be available in most states by the end of April.

In commercial auto, telematics has found a foothold as a safety tool, rather than a pricing mechanism. "Commercial is much different in that companies are deploying telematics for fleet management, and the insurance benefit is an afterthought," Welch says.

For instance, Liberty Mutual offers its Onboard Advisor program to policyholders and non-policyholders alike. Geared toward fleets with fewer than 1,000 employees, Onboard Advisor uses one of several manufacturers' devices to record location data along with driver performance, such as braking, acceleration, and cornering. Fleets and drivers can review safety scores at the Onboard Advisor online 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 benefits beyond pricing. "Telematics has the potential to provide real-time feedback to drivers across the spectrum. It can help retention through value-added services. It can result in better driver behavior so that losses go down," says Welch.

Currie believes that insurers in both personal and commercial lines need to look beyond price to find the true value of telematics. "Companies need to break out of the price spiral, which is a race to the bottom," he says. "Using telematics to appeal to specific customer segments, to keep drivers safe, or to create different types of insurance products—that's where the real innovation will occur and how midsized carriers can leverage telematics to differentiate themselves."

Even price-focused Progressive sees the far-reaching benefits of telematics. "To the extent people drive more safely, there's a real benefit to society," Pratt says. "That makes me feel good about coming to work."

Smartphones to the Rescue

UBI programs in the US have revolved almost exclusively around the black box, taking a retrospective look at driving and using it to 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 doors after just four years in operation.

But there are other options for providing driving behavior data. Smartphones may be a viable alternative for cost-conscious midsized carriers because many customers already have the devices, although there 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 plugged in, so it captures how you're driving every mile. With smartphones, drivers have to bring it with them, have it turned on, and have the app activated. It requires more customer involvement."

Ireland broker Autoline Insurance Group introduced a smartphone-based Road Safety Rewards program in 2012. The program allows customers to download an app for Android, iPhone or Blackberry devices.

"We began by looking at the black box, but being a broker, it's almost impossible to stock up [on devices] financially. So we started looking at the phone app," explains Caroline Currie, sales director, Autoline Insurance Group.

Autoline provides customers a cellphone charger to address the battery-draining nature of the application, as well as a dash-mounted cradle to improve GPS reception. The app, developed for Autoline by telematics vendor MyDrive Solutions, records GPS coordinates, trip date and time, acceleration and deceleration, and G-rating to measure cornering.

Autoline addresses the shortcomings of smartphone data collection by comparing miles driven to miles reported on the initial application. MyDrive is also developing a "Roadsense" feature that will use GPS data to track where the last trip ended and next trip began to ensure there is no unrealistic gap.

Location-based data—a privacy concern for many customers—was addressed by Autoline in its app development. "We as a broker don't look at where they've been driving," Currie explains. "We only get a score, which is less about where customers have been driving and more about what type of roads they've been on and how they are performing on those roads."

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

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

"Insurers recognize that this product is going to be particularly attractive to young drivers. In many cases, this is an area of the market that they don't currently write any business in, so their [base] rates are particularly high," Currie says. "Our telematics customers are by nature more responsible drivers who are happy to have their driving scored, be coached to drive better, and get further discounts. Parental involvement is generally huge, and overall they are a better risk. This warrants an initial discount."

Drivers then earn anywhere from a 10 percent additional premium discount to a 5 percent premium surcharge based on their driving score. Customers also agree that if they have an accident and the app 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 our profile as a broker, and there has been a great deal of interest from customers. A lot of that comes from parents who buy their children 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 to improve their driving score by 10 points or more to obtain a greater discount.

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

"The smartphone is not as good as the black box, but you will be much better at estimating the risk [by using it]," he says. "I call it pragmatic. It's accepting the level of data and correctness we get from a smartphone, which is not as comprehensive. The advantage is it costs you nothing—all you need is a customer's phone."

Other Lessons from Across the Pond

U.S. insurers can look to other examples from the UK when developing their own strategy. UK insurers do deal with different market factors influencing the use of telematics, the most significant of which is a European directive which mandates the installation of emergency call devices in all new passenger vehicles stating in 2014.

Although there is no such mandate in the U.S., car manufacturers here are building in more devices and features that turn cars into mobile computers. "There is likely to be a lot of development in this arena, and most in the industry believe that over time telematics data will be provided directly by the vehicles," says Welch. "However, because of the fact that this will happen over a period of years and only in new cars, it will take a long time before the majority of cars in the U.S. fleet are so equipped."

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

"Before the gender ruling, you could see differences of £500 pounds between a young woman and man. There was a valid reason for that, so today there is a strong pricing opportunity to use telematics to understand what kind of driver you have» using gender-neutral criteria," Bruneteau says.

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

The program is actually not gender-based and is open to anyone who can demonstrate they "drive like a girl." The program operates similarly to insurethebox›s primary offering and uses the same black box at no charge to the customer. Discounts can reach 18 percent after three months of "girl-like" driving.

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

Companywide, insurethebox has sold over 170,000 policies since its launch in June 2010. Evans says that there was some initial resistance to the "big brother" aspects of telematics among younger drivers, but this is less of an issue now that people have become used to the idea of box technology and understand its benefits.

"Already it has helped us to underwrite more accurately and given us a much better understanding of customers than would be possible with conventional insurance. The customer benefit—help in tracing stolen cars, rapid response to accidents using our alert system—has been as expected. We are delighted that our data shows that the incentives we offer really do reduce accidents," Evans explains.

Watch and Wait

Even though most midsized carriers are playing a wait-and-see game, they don't appear to be at serious risk of falling behind their insurance competition in the telematics marketplace—at least not yet.

"Right now the pioneers are learning and paying the premium of high costs to device manufacturers, systems integrators, and others. As telematics becomes more widespread, and cost and other concerns become less of an issue, I think there will be a point at which there will be a critical mass, and there will be a real rush to the marketplace," Breading says. "Any way you look at it, it will have a big impact on business."

Special Reports /

Telematics: Trouble or Tipping Point for Midsized Carriers?

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