As time passes, what was once considered innovative becomes commonplace. Not too long ago, the financial credit score as a rating variable for premium underwriting was an innovation. But now insurance industry watchers have turned to telematics. Over the past decade, a number of insurers have transitioned from discussion and experimentation to market introduction of insurance telematics. Still, as with most good tales, the hero has to prove its worth. And telematics has not been an exception to that rule.

Currently, telematics is the terminology routinely used to describe technologies associated with communication for a motor vehicle, from Google's self-driving vehicles to aftermarket location-reporting gadgets. Since the advent of the General Motors' OnStar program, there's been an increasing penetration of telematics capabilities and services in automobiles. Estimates put expected penetration by 2017 at more than 70% for car manufacturers' new vehicles. Today's telematics in insurance usually refers to the one-way collection of available information from a vehicle, currently with no capability for feedback. Strictly defined, that's telemetry, whereas telematics traditionally incorporates the potential for feedback, ranging from technology in autonomous cars to programs that identify driver behavior patterns. Figure 1 is a simplified diagram of the process typically available today.

 

 

The opportunity now exists for direct measurement of driver behavior in place and time.

The type of data that devices can collect from or about a vehicle varies by implementation, can influence cost, and is constrained by regulation and customers' willingness to share such information. Currently, there are programs in place that use sensors to capture data that may be as simple as distance (vehicle-miles traveled) or as sophisticated as camera-based recording. Devices are also capable of transmitting and storing the resultant collection for immediate or deferred analysis, meaningful interpretation, and/or visualization.

Many brand-name telematics programs fall into categories: usage-based insurance (UBI), pay-as-you-drive (PAYD), and pay-how-you-drive (PHYD). As the names imply, the factors affecting premiums are generally how much (far), when, how well (behavior), and where (location) the vehicle is driven.

Proxies for driving behavior include age, education level, and driving experience (years), which underwriters have enhanced with the use of credit-worthiness—an additional proxy to predict the probability of a crash and subsequent claim. But as reliable as they have proven to be over the past several decades, those factors are only proxies. It follows that the more a vehicle is used, the more it's exposed to risk. However, very quickly the limitations of that standard are questionable. Another consideration is how well the driver operated the vehicle in all conditions.

Next page: Transforming telematics data into something coherent and accessible for use by actuaries is a big job that requires a multidisciplinary approach. Learn how.

What Is Different Today?
Telematics data is categorically different than anything many insurers have likely dealt with before. Just think about the raw telemetry that a vehicle's accelerometer generates. The data can indicate the forces acting on a car in each of three dimensions at a moment in time. Now overlay road and environmental conditions from global positioning system (GPS) data, and the complexity of telematics data becomes clear.

Transforming telematics data into something coherent and accessible for use by actuaries is a big job that requires a multidisciplinary approach. Verisk Telematics studies have shown that the improvement in performance carriers may get from telematics data is significant. Rating decisions for a pool of drivers that otherwise share the same characteristics can be enhanced by applying telematics data and a third-generation analytic model (one that puts driving behavior in the context of the road and traffic pattern). Verisk studies show that the loss costs between best and worst drivers are separated by a factor of up to 10. It's precisely that sort of insight that tends to motivate insurers to speed adoption.

The typical business model for insurance telematics has offered prospective (or, at times, existing) policyholders a discount for joining a program. That's a self-selecting process that may attract low-usage, or "good" drivers to be early players in insurance telematics. Early adopters have generally pursued a "price-play" approach to increase market share while improving their risk pool. The late adopters are trying to avoid adverse selection, an erosion of their profitable, lower-risk book of drivers.

 

 

 

With rare exceptions, multiple UBI programs have been filed in every state. A handful of states have more than 10 insurance carrier programs. Some states, such as Oregon, have generally endorsed usage-based programs through legislation, while others have promoted their openness to adoption. Personal auto writers representing more than 60% of the market have "live" telematics/UBI programs, and more than 40 additional carriers are engaged in pilots or prelaunch activities. The number of telematics program filings in 2013 alone exceeded the cumulative number of programs filed in the six previous years. Our industry has definitely reached a tipping point.

The usage-based insurance (UBI) opt-in rate is expected to increase to 20% over the next five years, according to one recent industry poll. Other polls consistently show that two-thirds of consumers are open to telematics-based insurance policies, especially if there's the potential for premium discounts. Keep in mind that for newer consumers of vehicle insurance—the Gen Ys and the millennials—the use of that type of consumer technology is almost expected.

Carriers tend to have concerns with return on investment when they consider telematics programs. There are costs involved in telematics programs: First, insurers need to encourage policyholder to participate, which means marketing costs associated with launching a program. Then, of course, there's the cost of the telematics device and recurring charges to transmit the data. The good news for late adopters is twofold: Hardware and software costs are decreasing while the predictive value of telematics data is increasing. So the ROI outlook is much better today than it was 10 years ago.

The wealth of data that telematics devices transmit, coupled with advanced analytics and modeling, can allow insurers to predict future losses with a high degree of precision. That, in turn, may enable more accurate pricing. Finally, the opportunity for driver improvement through the direct, actionable feedback that telematics portals offer can be an overall win for society.

 

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