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Aspen Opinion

Telematics: A Revolutionary Road

February 5, 2016

Andrew Parker

Head of Casualty, Asia Pacific & Head of Australian Branch, Aspen Re

Tel: +61 2 9010 0464

Advances in technology are disrupting many industries. We look at the growth of telematics and the challenges and opportunities for (re)insurers.

Download this Opinion as a PDF

In the highly competitive market of auto insurance, telematics offers (re)insurers the opportunity to develop more accurate pricing structures with the potential to form a deeper relationship with the client. Insurance is all about risk – understanding risk; how it arises; how to manage it and how to pay for it. Telematics enables the insurer to create bespoke pricing designed on the client's particular profile of usage and behaviors through a more accurate risk assessment process.

Transforming Technology

Telematics is "the branch of information technology which deals with the long distance transmission of computerized information."1 Broadly speaking, it is technology used to send, receive and store information relating to remote objects, such as vehicles via telecommunication devices. There are a number of stakeholders in the telematics "connected" car revolution; insurers are one of many third party businesses but others include consumers, vehicle manufacturers and governments. Telematics yields both consumer and societal benefits in terms of better value, improved road safety, reduced congestion and lower carbon emissions. Uses include not just insurance but infotainment, navigation, convenience, safety services, fleet management and electronic tolling security. Vehicle telematics insurance relies on in-car monitoring by one of a number of methods, including the self-installed dongle, a professionally installed black box, an embedded device installed by the car manufacturer and a smartphone.

The Where, The When and The How

Telematics enables the insurer to monitor and diagnose where, when and how the car is driven as it contains a global positioning system (GPS). The SIM card transmits the information to a database and computer software transmits and analyses the data. The devices can monitor an array of features, including mileage, total driving time, seat belt use, speed, and braking and acceleration behavior, which allows the insurer to set premiums on the causal data rather than having to rely on a variety of behavior-based demographic factors. The latter are necessarily a proxy and some factors, such as gender, age and occupation, have proved controversial and have been restricted in some jurisdictions.

The telematics data can be analyzed and help finesse pricing, improve risk management techniques and reduce losses by enabling better claims assessments. Predictive models used to analyze and identify risks are able to segment the market with much greater accuracy. It represents a step change for the industry as risk assessment can be based on causal risk factors rather than correlated variables. The insurer can mitigate adverse selection, reduce high-risk behaviors and also improve brand recognition and loyalty through added services. This latter point is important – especially in the highly commoditized world of auto insurance. Usage based auto insurance (UBI) offers a number of routes to improvement of customer experience and to increase customer communication which, in turn, enhances customer acquisition and retention rates.

The consumer enjoys potentially lower premiums, greater safety and a better claims experience. Importantly, the consumer has the ability to alter (lower) the premium paid through moderating driving habits, distances and location. This has appeal for all concerned. Additional services valued by the client include theft tracking, automated emergency response and vehicle maintenance reports.

Dealing with Data

The shopping list of benefits for both consumer and insurer alike is not without some costs that have slowed the adoption of UBI programmes. For the consumer, privacy has been a major concern. The close monitoring of the how, the where and the when has met with some resistance. How the insurer uses, stores and shares this data, particularly given the escalation of cybercrime, are also part of this concern. There are considerable governance issues around the transmission and storage of this data and the transparency and disclosure of the rating factors used.

Barriers to entry for the insurer include the cost of technology and devices as well as installation, maintenance, logistics and the extraordinary data demands. The latter involve the lack of standardisation of devices and the need for investment in storage and analytics. Insurers also need to build a critical mass of data which incorporates both behaviour and environment and be able to know the difference between the "right" and "wrong" data (i.e. data that is actually relevant to rating the risk).

Varied Uptake

While UBI might seem to be a win-win development its use is varied, leading to a highly fragmented market. Within Europe – a leader together with the U.S. – Italy and the U.K. have significantly higher penetration rates. According to a recent report, there were 4.8 million European policies at year end 2014 with a forecast of 28.1 million forecast by 2019, suggesting a projected growth rate of approximately 42 percent per annum.2 In the U.S., higher growth of 51 percent per annum is expected to increase total policies from an estimated 4.2 million in 2014 to 32.5 million in 2019.3 By contrast, Asia Pacific to date has experienced a much slower uptake as pricing regulation, the slower development of data handling capabilities and the relative costs of UBI have all played a part. Resistance towards in-car surveillance has presented a further hurdle in Australia with concerns about invasion of privacy offsetting the potential for reduced premiums. In China, telematics in cars is predominantly a luxury product and for now uptake within the insurance sector is limited.

The proponents point to significantly reduced claims and policy administration costs as well as lower acquisition costs. UBI is not just about lower cost but fostering a stronger relationship with the client leading, in long-term, to an improved client retention ratio.

Fleet First?

While consumer resistance has slowed the adoption of telematics in the general market, traditional fleet management has proved a more fertile market. Fleet operators are generally more attuned to the benefits of vehicle tracking which helps manage the fleet through fuel optimization, productivity and driver behavior management as well as utilization and location of the assets employed. The proportion of traditional fleets fitted with tracking systems is forming strong growth in most markets. In the U.S., the fleet telematics market is forecast to double by 2016.4 Introducing incentives that support better driving behaviors is enhancing driver acceptance.

In Australia, the use of telematics in large fleets has been widespread for several years and has led to lower loss ratios. There are opportunities to expand usage in small fleets and reinsurers can help in this process through product development of data analytics. Moreover, further growth is anticipated through developments in the Australian insurance market where Work Place Health and Safety Acts impose a proactive duty of care on officers, directors and persons conducting a business for the safety of the people they engage. Road transport is a priority industry under the Australian Work Health and Safety Strategy 2012-2022 and accident prevention encompasses not only the work place health and safety regulators but, also, the National Heavy Vehicle Regulator and the National Transport Commission. Increasingly, fleet and vehicle (taxi, delivery, etc) management may wish to install driver monitoring systems to demonstrate that they have adopted policies and procedures to protect employees from themselves and help protect themselves from possible accusations of negligence.

Customer Care

Telematics insurance is a growth sector and offers the opportunity for improved risk management. Reinsurers can play an important role in this growth through data management and advanced analytics with deployment of predictive models that accurately access telematics data. Telematics insurance also highlights a fundamental (re)insurance industry requirement to make products more proactive and prevention-driven and less of a reactive commodity offering.


References

  1. http://www.oxforddictionaries.com
  2. Berg Insight2015 "Insurance Telematics in Europe and North America" http://www.berginsight.com/ReportPDF/ProductSheet/bi-insurancetelematics-ps.pdf
  3. ibid
  4. SBD 2025 Every car connected: Forecasting growth and Opportunity, February 2012

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The above article/opinion reflects the opinion of the author and does not necessarily represent Aspen's views. The article reflects the opinion of the author at the time it was written taking into account market, regulatory and other conditions at the time of writing which may change over time. Aspen does not undertake a duty to update these articles.