At Crossroads, Study Charts Two Future Roads for Telematics

It fights crime. It prevents loss. It mitigates it too.

Telematics—the “superhero” of car insurance—does all of those things, according to research and consulting firm Celent.

Telematics is an information-technology term that, in the world of car insurance, is applied to programs where driver behavior is tracked through data and shared with the motorist. But this marketplace titan is at a crossroads, according to Celent.

Celent’s latest study, titled “Innovation in Focus: The Great Telematics Experiment,” maps out the possible future of telematics based on two hypotheses: the “self-selection” hypothesis and the “null” hypothesis.

In its self-selection hypothesis, better drivers eventually choose telematics as a cheaper auto insurance alternative. But this happens only after the pool of traditional car insurance policies is crowded by worse drivers whose claims push up premium prices.

In the “null hypothesis,” the study said that telematics will be much like it is today: a haven for new drivers who rely on data-tracking “as a stepping stone” toward a strong driving record or for good drivers who have had a recent blip in their history and want to re-establish their good standing.

In both scenarios, riskier and high-mileage drivers will likely opt for traditional compared to telematics policies, since the latter offers little incentive at cheaper insurance for such drivers.

Instead, according to the study, which hypothesis wins out will be determined by the decisions of safer drivers who have, for years, kept their records clean of claims.

Need for Higher Premiums Would Drive ‘Self-Selection’ Prediction

In its “self-selection” hypothesis, Celent said that riskier drivers with spottier claims records will “swiftly decide that telematics policies are not right for them” and opt for traditional insurance.

That scenario could already be unfolding, as Progressive, which pioneered telematics in car insurance with Snapshot, said this year that it is considering penalizing riskier drivers in the usage-based insurance program. It would be a major change to Snapshot’s current structure that offers discounts to drivers exhibiting safer tendencies behind the wheel.

According to Celent, an exodus of worse drivers from telematics into the traditional pool of car insurance policies would make classic policies “less profitable over time due to the population of bad drivers.”

Good drivers with traditional policies, the study said, would then “self-select” telematics for a chance at discounts and less pricey policies since “poor drivers drive up premiums, making telematics more attractive.”

Status Quo for Marketplace in ‘Null’ Prediction

According to Celent’s “null hypothesis,” good drivers who’ve steered clear of claims for years will find “telematics policies are simply more expensive and troublesome.”

In this scenario, telematics will stay a relatively “niche” market populated by drivers who need to prove they are safe—either because they are new motorists or have recent marks on their record.

“Telematics policies therefore serve as a stepping stone for some niche groups to get access to a classic policy at a reasonable cost,” the study said. “[If] you’re classically insured and you have an accident, and you are at fault, then you may revert to a telematics policy to once again prove you are a better driver.”

For this scenario to unfold, according to Celent, telematics wouldn’t expand past its current state to more widespread use because of cost- and privacy-related obstacles.

Telematics Faces ‘Challenges’

Celent’s “superhero” is facing a few villains that will determine its future role in the marketplace. According to the study, insurers bear an “array of costs” throughout the entire telematics process that is one of those “challenges.”

“The devices cost money,” the study said of the devices that insurers use to track driving data. “Transmitting the data captured in this process costs money. Storing the data costs money. Analyzing the data costs money.”

Consumers face a challenge of their own: how much privacy are they willing to trade for the “rewards and benefits” that telematics could offer?

A recent LexisNexis survey on telematics showed that consumers are increasingly wary of their driving data being shared between companies.

A summer survey from Celent showed that there is wiggle room among consumers, some of whom would give up privacy if it came to their child’s unsafe driving habits, as opposed to their own risky habits behind the wheel.

“Some people don’t mind sharing information for the right rewards—whether financial or nonfinancial,” the study said.

The onus will be on insurers, the study said, who will have to identify those “right rewards” in relation to how much privacy the consumer will sacrifice.

Meanwhile, regulators will face their own challenge as they try to “protect customers without stifling this necessary space for innovation,” the study said.

The study also said that the global progress of telematics means that its foothold in one marketplace doesn’t necessarily mean the same foothold in another.

About Charles Nguyen
Charles Nguyen is an enterprising journalist who reported for Patch.com and the Desert Dispatch and was the editor in chief of the Guardian (the twice-weekly newspaper at the University of California, San Diego) before coming to Online Auto Insurance News.

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