Behind new fuel cells, connected cars are the next biggestdisruptor driving innovation in the automotive industry. Today’scars can already park themselves, help drivers avoid traffic, andautomatically find the closest gas station when the tank is low. Inthe very near future it will be the norm for cars to be autonomous.Connected cars are aligning with car owners’ digital lifestyles andoffer a safer, smarter, and enhanced driving experience.

|

For insurers, however, connected cars are altering thetraditional landscape of auto insurance and posing real challengesthat require insurers to rethink policies, claims processing, andtheir overall business models. Insurers who evolve with theautomotive industry are the ones who will secure their place asindustry leaders going forward.

|

Leveraging big data is mandatory

|

One of the features a typical connected car offers istelematics, which provides insurers with the ability to monitor howand where a person drives. Insurers can use and analyze this datato gain valuable insights on their customers that can help in thedevelopment of innovative solutions, improve customer experience,and ultimately develop new products specific to their type andstyle of driving. According to Capgemini and Efma’s World InsuranceReport 2015, big data analytics is expected to have the largestimpact by far on the insurance industry with 78% ofexecutives citing it as a key disruptive force. Analytics beat outregulatory change, ranked second at 46%, and third-place economicuncertainty at 42%.

|

The challenges for insurers

|

While data collection and analytics from connected cars providethe insurance industry with opportunities to gain customer insightsand improve business, it is not without its challenges. The sheervolume of data generated through connected cars can beoverwhelming. In one 12-month pilot, U.K. insurer Direct Line Groupgathered more than 11 million miles of data from connected cars.Going forward, insurers need to learn how to manage and distillthis large volume of data in an effective and efficient manner todrive real business insight.

|

An enormous volume of data isn’t the only challenge that comesfrom connected cars. In the future, connected cars are expected tobring accident rates down with capabilities like slowing downautomatically when they get too close to obstacles andcommunicating with each other on the road. While lower accidentrates are beneficial for society, sharply curtailed accident ratescould have a long-term chilling effect on profits from premiumincome for insurers.

|

In the short-term, however, fewer accidents will result in fewerclaims and therefore greater profits. (That is until the actuarialdata catches up and forces premiums down.) At the same time, thecost severity of accidents will increase given the higher cost ofreplacing the expensive sensors, radars and cameras built into thenew cars. With all of these moving parts, the pace of change andits ultimate impact on premiums, claims and insurance profits isdifficult to predict at this juncture.

|

Outside competitors also present challenges. If insurers don’tembrace the changing times that connected cars present andrepresent, they risk being disintermediated by third parties thatare more skilled in analyzing the vast amount of data thatconnected cars generate. Start-ups like Metromile, for example,offer per-mile car insurance and are already attracting low-mileagedrivers interested in bringing down their insurance bills. The listof potential competitors is long. Google, king of data managementand also a pioneer in driverless technology, could use its deeppockets to augment the industry through more effective data usageand insights. Additionally, automakers may choose not to share thedata they collect and rather use it to bundle their own policies inwith their vehicles like BMW, which recently took this stance.

|

|
Connected cars
|

(Photo: Shutterstock)

|

Thriving in an evolving landscape

|

Doing nothing is not an option. The only choice insurers have isto begin making strategic decisions about how to thrive in an eraof data-driven insurance. One way insurers can embrace connectedcar technology and data is by offering discounted policies tocustomers as incentives for maintaining good driving records – andmost customers welcome this idea. In fact, the World InsuranceReport found that 65% of customers would let insurers monitor theirdriving behavior in exchange for reduced premiums based on positiverisk assessments.

|

This type of pay-as-you-drive or pay how you drive policy wouldprice insurance premiums on the basis of miles driven or drivingstyle, much like telephone companies that charge by the minute.Such insurance would also take into account other risk factors,such as a driver’s expertise, whether they mostly do city orfreeway driving, or even how much experience they have driving insnow.

|

This capability will lead to dynamic insurance pricing that willvary based on a driver’s inherent risk, environmental conditions,the number of miles driven, and other factors.

|

With the advent of car-sharing services like ZipCar, Uber andLyft, the very notion of car ownership is being challenged. Peoplewho continue to own cars will likely start to demand usage-basedinsurance that takes into account the fewer miles or differentstyles of driving they put onto their cars, as they also takeadvantage of car-sharing options and other non-drivingtransportation modes.

|

Usage-based insurance can also be easily scaled to insure fleetsof vehicles. Rather than insure commercial cars or trucksindividually, insurers can pool their risk by insuring an entirefleet through better and more accurate use of data as opposed totraditional blanket policies. Through such programs, insurers canunderstand the risks associated with each vehicle and driver, andtailor insurance premiums accordingly. They can reduce claims bytracking the driving habits of commercial drivers and helping themimprove their behaviors, guiding them to better more effective andefficient routes.

|

The way forward

|

Some insurers may choose to take advantage of the fewer claimsthat connected cars will generate in the near future, thus lockingin greater profits in the short-term. Others may focus on thetransition, adjusting their pricing to meet the reality of reducedclaims, and perhaps gaining market share in the process. Some,reluctant to change, may simply refuse to cover driverless cars atall.

|

One thing is certain, cars are only becoming more and moreconnected, smarter and safer. They are vast data generationmachines on wheels that provide valuable information that companiescan leverage to drive new business models. Sticking our heads inthe sand and hoping our legacy approach and platforms will survivethe journey is a sure way to exit the industry. The future isbrightest for insurers who embrace and leverage big data analyticsand who are ready and willing to evolve with the rapidly changingpace of the uber connected auto industry.

|

Nigel Walsh is vice president and head of UK Insurance atCapgemini.

Want to continue reading?
Become a Free PropertyCasualty360 Digital Reader

  • All PropertyCasualty360.com news coverage, best practices, and in-depth analysis.
  • Educational webcasts, resources from industry leaders, and informative newsletters.
  • Other award-winning websites including BenefitsPRO.com and ThinkAdvisor.com.
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.