Pay to Play

It's difficult to describe anything about the personal auto insurance market that could be considered niche, but for years that is exactly how telematics has been perceived within the industry. As leading insurers continue to expand their use of the technology, though, it seems inevitable that carriers of all shapes and sizes will one day be adopting telematics.

Celent recently issued a report—Telematics-based Insurance: Has Its Time Finally Arrived?—and U.K.-based Catherine Stagg-Macey, senior vice president for the research and advisory firm, explained why this underwriting technology is beginning to accelerate.

"Auto insurance is a highly competitive market," she says. "Some of the major names are getting into telematics, and this will give them a huge first-mover advantage."

Among the advantages is the ability to build two- to three-years worth of data that can be used to price products appropriately. Since there is no third-party industry data with this technology, Stagg-Macey believes the internal data will be the key factor in gaining a head start on the competition.

"Consumers choosing telematics are likely to be better-risk drivers, and so those without a telematics program get selected against—without knowing it," she says. "This will become like a war game; if you aren't in it and investing, you will have a poor book of risk."

With better knowledge of how to price, insurers can shift this product to the mainstream market, particularly as more cars have embedded telematics installed, and both consumers and regulators become better informed, according to Stagg-Macey.

Insurers are considering the launch of a telematics program need to answer several key questions,explains Stagg-Macey. Those questions include:

• What are the distribution channels and what investment is required?

• How will the product be priced and underwritten?

• Will this product be handled differently in the claims process?

• How will the product be marketed?

• What IT capability is needed to deliver this?

• What analytics is required to support operations?

With telematics, adds Stagg-Macey, there are some additional questions such as: Will you use smart phones, or OBD? Does this require a network for installation of the device? What telecoms network are you using? How are you collecting this data? And how much of the data will you collect?

"Most insurers accept that the technology and process around telematics has arrived, but what is less clear is whether insurers can convince consumers there is value," she says. "In the UK, where telematics is aimed at the largely uninsurable young drivers, there is a fairly easy proposition to be made to the consumer. U.S. insurers are making some headway, positioning telematics insurance around the aspect of safety. That is something that appeals across age groups."

Main adopters of policies in the U.S. that are dependant on telematics include Progressive, State Farm, and Allstate—three giants—and Stagg-Macey explains the central issue is the size of the carrier's personal auto book of business (and to a lesser extent commercial auto). 

A secondary consideration, she adds, is the capability of a given insurer to apply current or new actuarial and analytic techniques to a large amount of telematics data, which can include new and unfamiliar types of data (e.g. time of day driven, types of braking incidents, etc.) 

"The personal auto business is highly concentrated in the U.S. among the largest players, who fight fiercely for market share," says Stagg-Macey. "Currently we are not aware of any smaller insurers pursuing telematics initiatives, but over the next few years they will follow the bigger more successful players. And there is always a chance a well-financed, geographically-focused smaller insurer could mount a breakout telematics strategy."

How have U.S. regulators been treating this approach? Fortunately, the feedback insurers have been receiving from state regulators is fairly sympathetic to the approach used in telematics, according to Stagg-Macey.

"There is some debate in how much data and how it is used, but broadly, regulators are comfortable with the premise of customers being charged for a product that is linked to usage or behavior," she says. "This is seen as equitable."