Pay-how-you-drive models are gaining traction. Here’s why:
Recent research is showing that vehicle telematics, the practice of equipping personal vehicles with a “black box” in order to collect data on the driver’s habits, is well on its way to revolutionizing the connected automotive insurance marketplace, and is already making big inroads in Italy.
Matteo Carbone, a principal with Bain & Company, says that in Italy, 16 percent of automotive insurance contracts renewed by the fourth quarter in 2015 have vehicle telematics—a whopping number that equates to at least 4.8 million black boxes on Italian roads right now. In a recent interview with Business Reports, as part of The Telegraph’s “Future of Insurance” campaign, he reiterates that telematics can help insurers activate a number of “levers” for their businesses: risk-based pricing, risk selection, value-added services, loss control, and customer loyalty.
Carbone has found that penetration of telematics is strongest in locations with high premiums, such as Naples, where customers want to contain costs. In an associated post, “Black Boxes Could Yield Gold in Connected Insurance,” he states that telematics have found a grounding in both pay-as-you-drive and pay-how-you-drive policies. Because these in-vehicle telematics systems can connect to wider ecosystems, it means insurers have new opportunities to strengthen bonds with consumers while simultaneously making their businesses more profitable.
Telematics is already having big impacts, according to Carbone, Bain & Company, and the ANIA Observatory on Telematics. Telematics-related policies in Italy have a risk-adjusted claims frequency 20 percent lower than other policies, and behavior-based premiums are encouraging customers to behave in less risky driving.
And the Italian example may spread globally. Consulting firm IHS states that while there were only 12 million consumers who had usage-based insurance in 2015, that number is expected to grow to 142 million by 2023.
Making sense of telematics data
Of course, insurance companies are facing a familiar conundrum: It’s not difficult to collect data, but it is difficult to first make sense of it, and then convert it into a benefit to the company.
“Data is a raw material,” Carbone says, “not an actionable knowledge.” Senior stakeholders at every company will need to come up with a strategy for each of the five levers, and ask a lot of questions. What goals are to be achieved? What new products could be introduced using telematics as a foundation? What needs to be installed to collect the requisite data? How can the internal processes (such as underwriting or actuarial duties) change because of telematics?
Carbone offers the example of an insurer that has an issue with customer retention. They should first create a product that helps retain clients who might be looking elsewhere, and then they can start to figure out how telematics can be used to not only discover those at-risk clients and offer this new product, but also increase loyalty.
“Telematics allow the insurance sector to increase the proximity with the client, to increase the rate of interaction with the customer—a proven way to increase loyalty,” Carbone adds. “But, to do that, insurers have to become able to manage an ecosystem of partners. To deliver that new customer experience, they have to act and think like an InsurTech, as a player that uses technology to achieve their strategic goal.”
The kind of technology that’s possible with telematics are rather infinite: Insurance companies are experimenting with whether driving behavior data can be used for anti-theft alerts; simplified claims because telematics data can fill in much of the information about the incident; street-sweeping or snow-plowing alerts based on the vehicle’s location; and even short-term insurance coverage when parking on a less-than-nice street.
Insurance telematics efforts underway
Insurance companies have already started to partner with established IoT companies and organizations to create an ecosystem that includes not only telematics, but also existing devices, such as smartphones, for truly unified and dynamic insurance marketplace. Allstate, for instance, has a usage-based insurance product called Drivewise that combines GPS data from smartphones with data from an onboard-device that collects information on behavior such as speed and hard braking.
Progressive, meanwhile, has a Snapshot IoT device that hooks into a car and monitors speed and braking, with safer drivers rewarded and riskier drivers penalized. Progressive teamed up with Hortonworks to monitor the driving behavior data on a Hadoop-based platform. Predictive modeling rewards drivers for how they drive, rather than the insurance premium being based on arbitrary factors such as age, type of car, and where they live.
Meanwhile, New England’s Conservation Law Foundation has a three-year study looking at whether telematics data can be used to reduce driving as a way of lowering pollution and traffic congestion. The pilot, funded in part by a Federal Highway Administration program for value pricing, will offer financial rewards for adjusting the amount, location, and timing of their driving. The study involves 3,000 policyholders of Plymouth Rock Assurance.