The impact of telematics on automotive insurance

By Mariia Kovalova

Insurance companies all around the globe are embracing telematics – the integration of telecommunications, vehicle technology, computer science and electrical engineering. Telematics systems help insurance companies collect data from policyholders’ vehicles and gain valuable insights into drivers’ behavior. Insurance providers then use these analytics insights to improve their risk assessment process and personalize policy pricing. Insurers also use this information to develop new types of insurance products and reduce real-time feedback to their clients, reducing the number of reckless drivers.

Although it is tempting to incorporate modern technology into your services as quickly as possible, insurance software experts strongly recommend exploring the advantages and limitations of telematics first.

How telematics systems benefit drivers

Auto insurance software enhanced with telematics collects data from Bluetooth beacons, mobile apps for drivers, or special diagnostic devices plugged into the vehicles to assess driving safety and track mileage. The software analyzes how, when and where users drive. That information helps insurers calculate a user’s risk profile. Drivers at a lower-than-average risk of accidents can enroll in special insurance programs to pay less for their coverage.

Insurers provide two main types of telematics-based plans to their clients, and those plans are based on different monitored metrics.

Usage-based: Insurance software assesses driver risk levels based on driving habits. Slower than average pace, smooth stops, driving during daylight hours and reduced mobile phone usage contribute to lower premium rates.
Pay-per-mile: Insurance software tracks drivers’ mileage. Those who drive less than the average person in their area can save money.

What’s more, the incorporation of telematics into insurance apps has a positive impact on driving culture. According to an Insurance Research Council survey, 45% of U.S. drivers reported improving their driving behavior after enrolling in a telematics program offered by their insurer, as their insurance cost went down when they were driving more carefully.

At the same time, in Iceland, telematics-supplemented insurance prompted more young people to drive. Before the spread of telematics, premium calculations heavily relied on accident track records, resulting in higher costs for people without such records. With the shift towards telematics-based pricing, premiums were no longer unfairly priced against those drivers.

Telematics software advantages for insurance providers

Insurance companies that implement telematics usually benefit from the following:

Underwriting profit increase. Insurers improve their profitability by accurately assessing risk and pricing their products accordingly. As their plans become more diversely priced for low- and high-risk drivers, insurance companies avoid turning away low-risk clients who find the flat rate unfair. This way, insurers expand their client base and collect more revenue. They are also better prepared to cover potential claim costs as they avoid undercharging the high-risk drivers and plan their budget with more precision.

Increased customer engagement and satisfaction due to dynamic discount models. Policyholders appreciate the chance to pay less while receiving the same coverage. This results in increased customer loyalty and reduced churn.

New insurance product development. Insurers can split policyholders into groups based on their driving habits (e.g., new drivers or senior citizens) and design tailored insurance products that address the unique risk profiles of each segment.

Fraudulent claim detection based on driving patterns’ analysis. For example, a sudden increase in hard braking followed by a claim submission might be associated with a staged accident or an exaggerated claim.

More effective risk management strategies and overall claims cost reduction. Insurance providers can identify high-risk policyholders and engage them in risk mitigation initiatives, lowering the possibility of costly claims. The mitigation measures can include additional education for drivers, vehicle maintenance reminders or surcharges for dangerous driving – all geared towards influencing more cautious driver behavior.

Challenges and limitations of telematics for insurance

However, not everyone is enthusiastic about the rising popularity of this technology. The sensitive nature of the drivers’ behavior data - which encompasses details like their location, speed and active times during the day - poses severe risks if leaked. Such risks deter policyholders from switching to insurance programs reliant on telematics or from insurance providers who employ this technology.

Thus, several countries and states have enacted laws or regulations restricting the use of telematic devices. For example, in Germany, it is illegal for insurers to collect telematics data without the explicit consent of the driver. California has stricter oversight over telematics usage in the U.S. compared to other states, with many limitations regarding data collection, processing and dispensing.

In addition to privacy concerns, other issues associated with the use of telematics devices include:

Faulty data. Telematics devices can sometimes collect inaccurate data, which results in wrongly increased premiums. For example, in some rare cases, drivers reported that their devices continued to count mileage after the car was turned off.
Cost. To enroll in the telematics-based insurance program and start saving, drivers must make investments first. Telematic devices can be expensive, and the mobile tariffs required to run them are higher than the average ones. For some drivers, these expenses negate the advantages of potential discounts an insurance company offers.
Telematics programs easily label policyholders as “bad drivers,” leading to elevated premium costs. Drivers complain about being penalized for factors beyond their control, like traffic conditions.

As with any new technology, telematics requires tuning to provide more accurate data and additional security mechanisms to protect its users. Still, even with these advancements, telematics-based insurance plans may not be a good fit for everyone.

It’s hard to overestimate the impact of the wide adoption of telematics in automotive insurance. It already contributes to safer driving while helping insurers and policyholders save thousands of dollars.

Telematics-enabled insurance software will undoubtedly evolve further and be integrated with other systems. For example, its integration with advanced driver-assistance systems for enhanced safety and risk mitigation is underway. Such integrations will enable insurance providers to develop new products and services and strengthen their clients’ loyalty and engagement.

However, due to the sensitive nature of the data gathered and processed by telematic systems, such systems must be adequately secured for this exciting future to become a reality. Software developers, device manufacturers, insurance providers, policyholders and, most importantly, regulators and government organizations must work together to devise the best strategy for protecting drivers’ private data.

Mariia Kovalova is a technology researcher at Itransition. Contact her at [email protected].