Insurance Models For a Telematics Driven Future

Current insurance trends suggest insurance is changing but slowly.

New models for pricing insurance have begun to emerge and yet most telematics motor insurance products tend to focus on monitoring driving style, location and time to check conformance with insurance policy terms. David Smith, chief executive at Global Futures and Foresight, adds that these new models include pay-as-you-drive or pay-as-you-don’t-drive as a means of ‘consuming’ insurance through telematics.

“Many insurance companies are taking their time to bring their products to market but it’s broadly speaking it’s about pay-as-you-go,” he says before commenting: “That’s the predominant and growing model for motor insurance but we’ll also see it for travel.”

He believes that context will be everything as it will be the key factor that will modify insurance premiums: “Increasingly we see it impact on personal, injury, travel of motor insurance, which will be more about the situation.” He also predicts that there will be more automation of pricing and compensation. This is because the loss an insurance customer suffered will increasingly be ‘better understood’. Subsequently, the insurance company involved won’t need the customer to claim.

Memento mori

Insurance pricing also relies to a degree on the insurance industry’s principle of memento mori, a stark reminder that we’re all going to die one day, or that most things will end and change.  Graham Gordon, director, global telematics at LexisNexis Risk Solutions, says its impact is highly exaggerated: “What needs to be considered is that we have decades ahead where cars will be on the road with varying degrees of autonomy.  The shift from personal liability to product liability will not happen overnight and ultimately the consumer will dictate how and when this shift occurs.”

“Insurance is a hard business to be in and while car manufacturers may play a role in delivering the insurance services of the future, we see this working as a partnership arrangement with the insurance sector.”

Market opportunity 

Roger Lanctot, director of automotive connected mobility at Strategy Analytics responds by pointing out that cars are crashing all over the world, leading to more than 1.3M highway fatalities.  This has a massive economic impact while creating, in his view, an equally massive opportunity to repair and to replace cars. “The interaction between the insurance industry and the automobile industry remains a robust and growing market opportunity – particularly in the context of both industries being fairly mature,” he says. This means that that market is competitive and it can lead to business being taken away from what he calls, “the other guy”.

That said, Smith thinks the market will be shaken up by ‘non-insurers’ who will take a share of the premium as people want to look for parties to protect them against loss, rather than to compensate them after an incident or accident has occurred. This suggests that insurance customers will be more prepared to pay for protection and, as a result, he predicts that insurers’ risk will fall.  Simultaneously, insurance premiums will also drop. However, he adds: “It’s the utility companies and others that will increase their revenues as they offer protective capabilities.”

Invest in telematics

With the potential for increased competition from non-insurance players, is it worth investing in insurance telematics? Gordon thinks there is for three main reasons:

 

1. Proven safety benefits of telematics. There has been a 35% reduction in road casualties in 17 to 19-year-olds as telematics adoption has increased. Furthermore, research of a cross-section of more than 3,000 UK motorists and found that 60% wanted UBI but only 5% were being offered it.
2. Return on investment. Aside from improved claims loss ratios among high risk policyholders, the perceived benefits of UBI are evident in customer retention rates and Net Promoter scores, with one US insurer seeing a 20% increase in the average lifetime of its UBI customers compared with its traditional motor insurance customers.
3. Customer engagement: It allows interaction with a customer throughout the lifetime of the policy fundamentally changing the insurer/customer relationship with the potential to improve brand loyalty.

Lanctot adds: “There are emerging opportunities in claims management and first notice of loss applications.  This part of the industry is just beginning to see the introduction of artificial intelligence to streamline claims management along with tools to give carmakers a leg up on participating in the process to better retain customers and capture repair and replace opportunities resulting from driving mishaps.”

UBI over hyped

Nevertheless, he feels that the UBI proposition is overly hyped: “Vehicle data can and ought to be used for the purpose of more accurate risk underwriting but few drivers are interested in a ‘more accurate’ assessment of their driving acumen – especially an assessment arrived at by their insurer.  There is not a lot of trust there.”

He reveals that most people aren’t paying enough for insurance “to care about the discount, and most insurers are at least somewhat uninterested in spending or investing in technology intended to create a discount”. However, in his opinion insurance telematics offers a superior and much more streamlined management process, proclaiming it to be a “winner”.

Out of the loop

Smith concludes that the future is bright for telematics insurance but not necessarily in the traditional sense of traditional insurance: “Telematics will multiply but whether insurance will be part of the mix and use it for one reason or another is another matter. I personally don’t think it will be insurers. There are plenty of other insurance areas for insurers to get involved in, but for the risk management and mitigation of vehicles – they are pretty much going to be out of the loop.”

The future will tell whether traditional insurers will do enough to sufficiently remain in the game. To do so, they will need to make more use of telematics data. At the moment the use of telematics data, according to Gordon, is fractional. Raising the need to incorporate this data into the claims process.

Even in the US, where he says many insurers have incorporated “third-party data and analytics into their application and underwriting processes, few have integrated data deeply into their claims process”. The trouble is that this all requires some significant investment, and insurers are finding it hard to justify such an expense as this because telematics insurance suffers from low market penetration. Yet, more needs still needs to be done by insurers to survive the telematics-driving future.