The new wave of telematics means better value and safer roads for auto insurers and policy-holders alike.
The theory behind usage-based insurance is pretty simple. It can be handled in different ways, but they all boil down to the same thing: you pay for what you use. Crucially, it’s easily understood by consumers; a natural next step for an industry with such high cost pressures. It first evolved in the US automotive sector about 10 years ago and has spread slowly but steadily since as the costs of technology have dropped and driver appetites have grown.
Telematics are the key. Odometer readings monitor people’s mileage (pay-as-you-drive), while easily-installed sensors build on this by noting how and when they drive (for pay-how-you-drive and pay-as-you go solutions that can also offer active feedback).
The combination of real time information on acceleration, braking, speed and location means the insurance company can tell the difference between types of driver – those who take off from the lights at top speed, corner and brake hard, those who drive at night…or those who drive slowly and gently – and adjusting their base premium accordingly. Adding other data that the insurer knows about the policy holder – age, occupation and other characteristics – you can quickly see how it can be an incredibly sophisticated product. Many of the current crop of usage-based insurance products are aimed at young drivers, rewarding them for good behavior.
So that’s an idea of the service, but what’s in it for the insurer? Well, while it's in its infancy and not without resourcing costs, the benefits quickly add up. Policy holders can make big savings by signing up. Insurers who are quick to pick up early entrants and ‘good’ risks first will pay out less claims, which also leads to safer roads and fewer traffic deaths. Further use of data is a sensitive topic, but one clear fringe benefit is that with the extra data, insurers would greatly improve their fraud detection – each vehicle’s telematics effectively creating a ‘black box’ that would say where it was and how it was being driven whenever an accident might occur.
Then there’s the product and service story. User-based insurance means a completely new relationship with the customer. Especially when insurers are making first contact with young drivers and people who are on their first steps towards buying life assurance and so on. Fluctuating monthly bills means constant contact with policy holders, creating further chances for cross- or up-selling. It’s a brave new world.
Auto insurance is a hugely dynamic market. Margins are under constant pressure and competition is intense. Consumers have more choice than ever before. This is not a situation that looks like it will change in a hurry. But with the right use of technology, insurers can afford to assess risk more completely and so stand out with new pricing models and products that focus on the individual, while also collecting experience in machine-to-machine technologies that can be transferred to other lines of business.