Report: Insurers Could Get Hurt by Late Adoption of Telematics Tech

Auto insurers are increasingly offering programs that use electronic devices installed in policyholder vehicles to track driver behavior and mileage—a growing trend that coverage providers cannot afford to miss out on, according to a new report.

At least half the top 20 property and casualty insurers in both the United States and United Kingdom either have a program or are developing one that uses telematics devices, according to the report from Celent, an information technology consulting firm.

The trend continues to be driven by ongoing reductions in the cost of manufacturing the devices, more favorable governmental regulations and a reduction in the privacy concerns of consumers, who some sources say are increasingly recognizing the benefits of taking part in such programs, the report states.

“The threat to late adopters is real: Better drivers will enroll in telematics programs, leaving behind a shrinking pool of poorer risks to the traditional insurers,” writes report author Catherine Stagg-Macey, a London-based Celent official.

The report is the latest to document an increase in the number of vehicle insurance providers offering voluntary programs through which policyholders can outfit their cars with high-tech gadgets that capture data on speed, distance, hard braking, and other information. That data is relayed directly to the insurer and can lead to discounts for drivers—if they’re shown to be safe behind the wheel.

Insurers have long set rates based on traditional criteria including factors including age, gender, vehicle type, driving history and location. And usage-based programs that predate telematics factored in the number of miles driven, with insurers relying largely on either driver estimates or odometer readings.

Usage-based programs that make use of the electronic feedback from telematics devices, however, automatically provide data that say much more about how motorists actually drive, giving insurers a clearer picture about the level of risk posed by a particular motorist.

That allows for greater accuracy in pricing by insurance companies, who are then able—at least in theory—to reward safe drivers who don’t go too far from home too often with potentially some of the lowest cost car insurance the companies have to offer.

But Stagg-Macey says some of the risks and benefits of programs that electronically track driver behavior are still emerging.

As greater numbers of drivers who are safe—and whose driving habits prove it—enroll in programs that feature the electronic gizmos, companies that have not taken that road “will find themselves insuring shrinking pools of poorer drivers, who will appear to be normal drivers if traditional rating factors are used,” according to the report.

Meanwhile, the mere knowledge that electronic devices are present in vehicles has been shown to result in some motorists’ reducing their speeds and braking more carefully, Stagg-Macy says, making them safer and providing a potential financial boost to policyholders and insurers alike.

In addition to any savings customers may earn for safety, the devices also can give them details about how their car is being driven by other family members, make it more clear to consumers how their premiums are priced and provide feedback on fuel consumption and carbon dioxide emissions.

The report notes the success enjoyed by Progressive Insurance, which led the way in usage-based discount offerings with its Snapshot program. A long list of other coverage providers has come out with telematics-based programs in recent years, including major companies such as Allstate and State Farm, and—more recently—smaller vehicle insurers like the Hartford and Travelers.

Celent points out a significant difference in the marketing of telematics programs between the U.K. and the U.S., where insurers have pitched the offerings as a chance to save by logging few miles and driving cautiously.

In the U.K., meanwhile, companies have focused mainly on marketing to teens and other groups who are considered above-average risks on the road. One British company, Aviva, launched a pilot telematics program in 2004, later pulling it off the market in part because of a lack of interest and problems handling the sheer volume of data delivered.

But interest is expected to increase in both nations in the coming years, due to a number of factors, including skyrocketing coverage costs in the U.K., where premiums increased by 38 percent in 2010, according to the report.

Stagg-Macey writes that insurers in the near future will probably pursue a “scaled-down approach” toward their telematics offerings in order to keep costs low. That can be done by installing the types of devices currently being used or by opting to employ the technology of smart phones—which share many features with telematics devices.

State Farm already offers a smart phone application—Driver Feedback—that monitors vehicle operation through the device’s accelerometer and GPS location to provide consumers with driving scores. One of the problems insurers could face by taking this approach is the need to make sure the smart phone has been switched on, the report points out.

There is also the possibility of greater use of equipment that is built into the vehicle, which is already employed as part of Ford’s Sync program and General Motors’ OnStar.

The report claims that BMW has announced plans to pre-install telematics software in cars for the European market starting in 2015.

Several issues will have to be carefully considered by insurers planning to introduce telematics programs, Stagg-Macy says. They include which client segments to target with the program, how to keep policyholders’ data safe—and assure them it is—adhering to legal and regulatory restrictions and integrating the use of data into existing claims-handling process.

About Ben Zitney
Benjamin Zitney has been covering the auto insurance industry for the past 2.5 years. Before coming to Online Auto Insurance News, he produced an extensive company history of the 30-year-old California Joint Powers Insurance Authority and worked at the Cal State Long Beach Daily Forty-Niner as a reporter, copy editor and news editor.

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