Early results suggest this evolving technology will benefit both personal and commercial vehicle market
O ver a decade ago, the insurance industry hit upon the idea of "pay-asyou- drive" auto coverage. While it goes under several different names such as "usage-based insurance" or "telematics," the goal is typically the same: to try to find a more precise method of developing auto insurance rates. It was not long before several early adopters began to develop their own systems. Progressive Insurance Co. was one of the first to work with this concept in 1999, offering it as a pilot program in only one state. Today, however, they are not alone in their quest to find a better rating methodology.
Most agree that telematics is the technology of sending, receiving, and storing information via telecommunication devices that are located in a vehicle. Much of the original work revolved around the personal auto market. While many in the industry agree that telematics has significant merit, there are a number of challenges that need to be resolved. Among the more difficult ones are the following:
Cost-Originally telematics was viable only for large commercial fleets. However, over time, the technology has steadily gone down in price. Today, there are a number of ways to provide the needed information that can prove cost-effective even for single vehicle applications.
Data management-One of the byproducts of the telematics platform is that it typically provides large volumes of data about a wide variety of inputs. Initially, most systems could provide only two or three key data inputs. Today's telematics systems can provide more than 100 data inputs, so it becomes critical to determine how to get that much data, and then what to do with it.
Privacy-As time has proven, this is a giant concern not only to the consumers but also to consumer watchdog agencies. As a general rule, consumers, have been reluctant to share information regarding their driving behavior. Additionally, there has also been reluctance to share location data. Most of this centers on the concern about abuse and/ or mishandling of this sensitive data.
Over time, the industry has managed to resolve most of its major challenges. The cost of the actual device has steadily fallen and today there are several brands that are below $100. With competitive pressures growing, they should fall even lower in the near future. Additionally, some insurers have found ways to utilize smartphones making it unnecessary to purchase the telematics device at all.
The data management issues have also pretty much resolved themselves- thanks in large part to increasing bandwidth available from a number of mobile communication companies. And insurance companies are finding new and valuable uses for the data.
With regard to the privacy issues, once again, the mobile communication industry has helped to resolve this issue. Consumers, especially younger ones, are less concerned with this issue. The growing use of smartphones, GPS and electronic toll collection devices indicate a decline in consumers' concerns with privacy.
Best is yet to come
Insurers are still testing how best to use this new technology. In the United States, for example, the majority of carriers are working to attract safe drivers who maintain low travel distance with a promise of lower rates. This is in sharp contrast with how telematics are being used in the Unied Kingdom where insurers are directing their sales efforts at inexperienced drivers who would typically be considered "high risk" under normal market conditions.
Regardless, it appears that insurers in both countries are using telematics as a method for consumers to directly influence their premiums. For the most part, insurers have continued to offer telematics on a voluntary basis to their insureds. At this point, few insurers are providing upfront discounts for using telematics. Instead, they are choosing to provide meaningful discounts at the end of the first year. Here, depending on the actual experience of the driver, discounts can range upward of 35%.
To sweeten the deal for drivers, some insurers are also beginning to add a variety of value-added services to their telematics packages. While these services can take any form, recent examples include such things as emergency roadside assistance, stolen vehicle locaters, vehicle diagnostics and teen driver alerts. A recent addition that is getting significant attention is the ability to stop cell phone and text messaging any time the vehicle goes over five miles an hour. Many insurers are beginning to incorporate these concierge-type services and consider them to be a critical part of their overall marketing strategy.
When used properly, there is little doubt that the use of telematics can assist an insurance company to better rate an auto policy. Progressive, which is now in its third-generation "Snapshot" telematics technology, has proven that it does a better job of rating than the more traditional methods like credit rating analysis, age, gender, etc. Even a casual observer can see that there is a direct relationship between being able to determine actual driving habits and the miles driven with a driver's loss experience. But that is just one aspect of the telematics model.
Not to be overlooked are the longterm risk mitigation applications available from the use of telematics. It is no longer just a system that tallies up the total number of miles driven in order to determine the correct rate. A much broader risk management platform is emerging as a result of the use of telematics. Technology advances have now made it possible to go far beyond tallying the number of miles traveled. Today, these devices can also log driver behavior including speeding, rapid acceleration, hard braking, sharp cornering, aggressive lane changes, as well as the use of cell phones or other mobile communication devices while driving.
There is an indication that the use of telematics can lead to fewer losses. The Federal Motor Carrier Safety Administration (FMCSA) notes that there has been a significant reduction in fatal truck accidents between 2007 and 2009. They indicate that the rate has dropped about 31% during that time period. While it still remains unclear what the exact reasons are for this marked improvement, many fleet managers are pointing to the use of telematics on their long-haul trucks as one of the primary reasons. They noted that once the telematics are introduced, the accidents go down. Not to use just another tired old cliché, but, "It is just that simple."
Safe driving is a great reason for corporations or even families to consider the use of telematics, but for corporate fleet owners it can provide an additional useful by-product. In 2010, the FMCSA, which sets the rules for maximum hours worked and minimum rest periods for drivers, began to require any company with repeated rule violations to begin installing onboard electronic recording devices to log hours of service. Then, last year they tried to expand this rule to a much broader group of companies. While this legislation has been held up in a federal appeals court, indications are that all issues have now been resolved and the legislation is expected to take effect shortly.
Additionally, the FMCSA has designed a driver safety scoring system that holds drivers and their employers responsible for correcting unsafe conditions. Assistance in resolving this rising regulatory burden is certain to be helped via the utilization of the telematics.
A new generation of telematics is already in development and beta testing. The new system known as "accelerometer" will allow insurers access to even more information. Insurers will have a wide array of driver behavior traits to choose from. Use of the accelerometer platform will expand available risk factors from the current 40 factors to more than 100. Insurers are counting on the fact that with the addition of more risk factors, they will be better able to determine the most appropriate premium for a given driver(s).
Acceptance of telematics has begun to quicken as consumers see the value of this approach. Many in the industry are predicting even faster growth nearterm. According to insurance consultant Towers Watson, 18% of U.S. personal and commercial auto carriers either currently use, or are planning to use telematics in the next two years. Others believe that the growth in the next few years will be in excess of 20%. There are sure to be significant advantages to those insurers that are early adopters of telematics.
Some within the insurance industry are suggesting that telematics is a "game changer." This is a moniker that at times we are willing to award to almost any new idea or technique. In the final analysis, in order to qualify as a game changer, it must be "a person or idea that transforms the accepted rules, processes, strategies and management of business functions." Typically it "leads to a movement of related businesses in the same direction." While telematics has not yet achieved this lofty position, it appears to be heading in that direction.
One thing appears indisputable: If telematics continues to gain acceptance, it will undoubtedly result in more accurate development of both commercial and personal vehicle rates. Further, as acceptance grows for telematics, one would expect that the better risks (i.e., good drivers) will migrate to insurers that provide telematics-based rates. Additionally, as can already be seen, this better rating is really just the tip of the iceberg; the long-term effect should be to encourage safer, better educated drivers on our highways and byways. The loss mitigation aspects may well be the lasting legacy of the telematics story.
A much broader risk management platform is emerging as a result of the use of telematics.
By Michael J. Moody, MBA, ARM