Although machine-to-machine technology (M2M) – wireless connectivity between machines – has recently gained profile in the European and North American insurance sector, it began to appear in the UK nearly a decade ago, when insurers began to use telematics ‘black boxes’ as a means to transmit actual driver data to the insurer, observes Murray Raisbeck, Partner, KPMG in the UK.
Until recently, prohibitive roll-out costs and fears of infringing on data privacy laws were among the factors that prevented insurers from embracing telematics sooner. That’s changing now that the cost per gadget per car – and the ability to house and analyze the data on a grand scale – is making telematics economically viable.
Today, those insurers who persevered with the technology – or the fast followers who took note – are realizing the potential to better serve certain segments. They also see the longer-term prospect of rebuilding mutual trust with policyholders and developing fresh customer propositions for the mass market.
“2013 felt like it was a transformational year for telematics in the UK,” notes Raisbeck. “We witnessed the launch of a number of telematics only brands, as well as niche propositions being trialed by established insurers.”
“In the short-term, motor insurers are discovering that telematics can help them serve more accident-prone, high-risk, young male drivers where ironically there is more opportunity for profits if risks are priced correctly,” says Raisbeck, explaining that insurers typically penalize younger policy-seekers – including female drivers or parents who pay family car premiums – due to historical links between youth and high accident rates.
Breakthroughs in telematics are providing a solution. By offering telematic devices to policy-holders, an insurer could empower customers and reward good drivers with cheaper premiums.
Such programs can also provide an indirect ‘self selection’ benefit for insurers, since bad drivers may look elsewhere for coverage, helping firms avoid customers they’d rather do without.
As an offshoot benefit, Raisbeck adds that, at least in the UK, telematics is helping to heal strained relations between insurers and legislators who can boast to constituents how insurance firms are lowering rates and indirectly helping unemployed British youth find jobs by increasing mobility.
Politicians also hold out hope that telematics can be a key weapon to improve road safety, since dangerous driving is the biggest cause of accidental death among young adults. Rewarding good driving, and penalizing bad driving, could result in changes to driver behavior.
Is the investment paying off? Although it’s early days, industry experts believe that policyholders can save up to 20 percent on premiums while insurers could lower claims costs by up to 30 percent. And savings could grow as volumes rise.
That said, the data to support these theories are still relatively limited, points out Raisbeck. He explains that, “There are only a couple of insurers in the UK that have any significant volume of telematics policyholders, so we must ask whether the pioneers who have started writing higher policy volumes get a first mover advantage from the data they collect? Or, will the fast followers, of whom there are many, attempt to learn from their innovative peers and from their limited pilot projects?”
Insurers also face considerable costs to roll-out telematics. Many firms initially preferred to collect data from a black box installed in the car since it is always on and can supply high-resolution accelerometer readings. However, the cost to supply and install these black boxes has been high, reducing the size of the addressable market for insurers.
Advances in app development and the much more favorable economics are pushing some insurers towards GPS-enabled smartphones as the data collection device, although at the moment insurers do not entirely trust the data they are able to collect from these apps. The data are open to manipulation from drivers and also must be cleansed to ensure correct interpretation of GPS points. Regardless, significant investment is going into making telematics apps more reliable and trustworthy, which will be another catalyst to increase the take up rate.
Now, many insurers are considering ways to apply telematics to other customer segments, particularly policyholders who are less likely to benefit from lower premiums.
“For mature, mass market customers whose premiums are lower and who are therefore less responsive to percentage reductions in insurance premiums, insurers might focus on how telematics could add value to claims handling or customer service,” observes Raisbeck. “For example, telematics could help an insurer streamline inefficient processes and improve the ‘customer journey.’ Or, they could introduce interactive roadside assistance. Such ‘soft benefits’ enable insurers to build brands around service vs. commoditized pricing and products.”
In addition, some of the larger, innovative insurance brokers are making progress in telematics and are offering compelling propositions to insurers who have not yet generated sufficient momentum internally. Both insurers and brokers can benefit from writing more telematics-rated business since all parties are enabled to offer competitive but profitable prices to younger drivers and other higher-risk segments. However, a tussle is emerging over data analytics since brokers are keen to justify and even increase their commissions by offering telematics insights to their panel insurers. Meanwhile, insurers wish to build their own data analytics capability to remain one step ahead of competitors.
“Overall, insurers are following a variety of telematics strategies and it’s too early to say which approaches will be ascendant,” says Raisbeck. “The key at this stage is to keep the thinking open and creative, and not to bet the house on just one specific approach.”
Telematics are just the tip of the M2M iceberg, since sophisticated in-car devices could provide a mountain of marketing data. And in the not so distant future, driverless cars could force insurers to rethink how they protect vehicles, drivers, auto manufacturers and transport infrastructure.
But what can be learned from the early days of telematics? “We see that the initial experimentation by insurers set them on the right path, even if projects were shelved until market conditions caught up or technology costs came down,” notes Raisbeck. “It took the advent of the cloud to provide the best way to manage so much data.”
On the other hand, some insurers were too easily deterred by obstacles like data privacy rules, adds Riasbeck. “It suggests that some insurers don’t really understand the laws and they might be too cautious in pursuing technology innovation.”
The biggest take-away may be the benefit for insurers of building R&D units, forming partnerships with tech firms or joint ventures with manufacturers to explore the opportunities and pitfalls of new technologies.
Concludes Raisbeck, “While it’s impossible to predict the exact scale and impact on the insurance sector, those firms that can adapt quickly, collaborate and innovate will be able to harness the benefits of the M2M technological change.”
Rapid emergence of new technology - from cloud computing and mobile devices enables insurers to gain customer insights