 In a series of three articles Ivan Clarke is joined by Catherine Barton, Partner with Ernst & Young’s European Actuarial Service, Sherdin Omar, manager with Ernst & Young’s European Actuarial Service practice and Chloe Paillot, Senior Manager with Ernst & Young’s European Actuarial Service practice, give an insight into telematics insurance. In this first article we focus on the technology backing telematics insurance propositions: is the customer ready to engage with the technology behind telematics insurance products?
It is a cold January morning as I get in to my car. Thankfully, the car heats itself whilst charging so as I settle in to my seat it is already warm. I push a button and the dash board springs to life. A voice announces that my smart phone is connected and asks me whether I am driving to the office or to another destination this morning. “Office,” I announce. “Setting fastest route through this morning’s traffic” comes the reply. I set off on my usual journey to the city, checking the schedule for the day which is both displayed on the centre console and read aloud by AVA my automated virtual assistant that lives on my Smartphone and integrates seamlessly with my car. AVA tells me that I have a lunch appointment with a client and asks if I would like her to find a restaurant close to the client's address. I select a restaurant from the options and AVA calls the restaurant for me to make the reservation.
According to AVA, the traffic ahead is suddenly heavy and readjusts my route. As I slow down at the junction, the light turns amber to green and I speed up. From the right, a van comes speeding for me, swerving before ploughing into the side of my car. The side airbags deploy, cushioning the blow. The car comes to a stop and AVA announces that she has detected a collision and is notifying the emergency services.
The phone rings; “Hello Mr Clarke? We have detected that your vehicle has been in an accident, can I ask first if you are injured?”
“A little shaken but otherwise fine I replied. The insurance representative informs me that she has already obtained the other driver’s insurance details and that everything is taken care of before finally arranging a recovery vehicle for my car and a taxi for me.
Of course none of this took place but represents a glimpse in to the not-so-distant future as Telematics emerges in the field personal motor insurance.
The first arrival of telematics in the world of personal motor insurance began with a fanfare and left with its tail between its legs: Aviva’s early foray was very short-lived. Approaching a decade down the line and telematics-linked insurance offerings are springing up from a number of different providers – Insure The Box, Coverbox and Young Marmalade to name a few. With the imminent removal of gender as a rating factor and proposals to limit the use of postcode as a method of differentiating risk, has the time now come for telematics technology to wrestle its way to become a mainstream offering in personal lines motor insurance?
Telematics technology is already very much a part of consumers’ everyday life: online shopping deliveries, whose location can be tracked on-line; GPS devices enabling journeys to be planned to avoid traffic hotspots; the breakdown company who can say how long it will take to respond to your call. Positive benefits for the customer, most would agree.
So let’s move on a step to telematics in insurance. Why wouldn’t the customer like it when the technology can clearly bring so many benefits?
Clearly there is a big difference in the use of telematics in other commercial applications which the customer may benefit from and applying it for insurance purposes. In the former, it is information about the actions of a third party which is being tracked, whereas in the latter it is information about customers themselves.
Some customers simply will not want to engage with this application of telematics technology, maybe because they just do not like the idea of their movements being tracked or because they are risk-takers who know that their insurance premium would likely increase if the insurer knew more about their driving habits. So let’s put these customers to one side – they won’t be opting for telematics insurance products in a hurry.
There are however some customers who may be quite happy to gain the benefits from the technology – an insurance policy priced specially for them, the comforting knowledge that someone else knows instantaneously when an impact has occurred, saving critical seconds and minutes which could be life-saving following a devastating accident. If customers might be happy in principle to gain from these benefits, what would insurers need to do to attract them sufficiently for them to select a telematics product over a traditional motor insurance policy?
Is the technology cost too high?
Obviously one important component is price – the technology has to be available sufficiently cheaply for the insurance premium to be competitive for the customer.
In the early days, the cost of the “box” installed in the car was expensive and led only those with high premiums being able to obtain quotations which were comparable to those on a traditional policy. In the same way as all technology comes down in price over time though, it is reasonable to assume that as demand for the technology increases with greater take-up of telematics products and as the technology becomes less “brand new”, the customer for whom a price-competitive telematics insurance product can be offered will increase.
There is always a counter-argument that the telematics technology itself has a positive impact on claims costs. Without telematics technology, the insurer can only rely on the insured’s and claimants’ explanations of what happened when an accident took place; with telematics, the insurer is de facto “in the car” with the driver. The driver behaviour recorded by the technology should support an insurer in identifying which of two named drivers, say, was driving the car at the point of an accident, due to the information recorded about individuals’ varying driving styles. For a good customer who only wishes to make legitimate claims, having the insurer as an eye witness should only act to limit the claims costs incurred, which in itself could have a beneficial impact on premiums.
Who’s at the steering wheel?
The current telematics products on offer are very much insurer-driven: the insurer takes responsibility for selecting the telematics technology and installing it in the vehicle. There are obvious motives for an insurer to take this role: aside from the claims mitigation benefits and the ability to understand how a vehicle is being driven, telematics products tend to engage the customer with greater frequency due to information being available about the customer’s driving performance, leading to more insurer:customer touchpoints. This gives insurers the opportunity to divert their customers’ focus towards their product’s brand, service and quality and, critically, away from price.
Over the next several years, the need for such telematics technology installations will likely reduce. From 2014, all car manufacturers will be required to install telematics technology in their new vehicles, which not only removes the installation costs but the need to install specific technology for insurance purposes: it will already be there! One can imagine a world where the telematics technology is simply an extra feature of the already very sophisticated on-dashboard computer systems which already provide detailed data about how the car is being driven, its servicing requirements and, of course, entertainment to passengers. Naturally each car manufacturer will do their own thing in trying to produce the best technology for their customers, which will undoubtedly lead to data challenges for insurers using it for pricing and underwriting purposes, a point we will return to in our next article.
However it is a clear opportunity for car manufacturers to build on their already strong brands and extend them further into the insurance space, which will likely act to increase their customer loyalty and flow of own damage repairs through their body-shop networks, which typically are a lucrative part of their business models.
In these two scenarios either the insurer or car manufacturer decides on the technology in use, but maybe there is an alternative solution. Both insurer-installed and inbuilt car manufacturer technologies support telematics insurance solutions akin to the current model: technology installed in a vehicle, either after or at the point of sale, which will inform the insurer about how that vehicle is driven. In the same way that the insurer never actually knows precisely who is driving a vehicle, the telematics insurer will still only know that a vehicle is being driven rather than who is driving it (save airport-like eye detectors or fingerprint readers being installed in cars to identify a specific driver, which is at best unlikely). Maybe a better solution for understanding the risk of driving the vehicle – particularly for the injury related claims cost – would be to know with greater confidence who actually is driving a car. Is it Parent aged 50, or Teenager aged 18?
Perhaps therefore the ultimate technology solution, and a way to get telematics technologies to the masses, would be to have the technology embedded within a device which the individual is reluctant to part with (or increasingly is an integral part of an individual’s life), such as a Smartphone or similar – which would really put the customer at the wheel. And – belts and braces –pairing a Smartphone with a car’s installed telematics device would give the confidence that a specific driver is driving a specific car. Of course, all these potential developments would be exposed to manipulation (the Teenager “borrowing” a Parent’s phone, for instance), but could give greater ability for the insurer to price for the risk correctly and for the customer to know that they are paying a fair cost which reflects their risk, all with a seamlessly smooth delivery of a telematics insurance policy to the customer.
Can the technology be trusted?
Technology is all well and good, but we all know that it can fail. Customers need to be confident that their insurance will pay out even if the technology falls over for some reason. Ultimately the responsibility for this must remain with the insurer. Once a certificate of insurance is issued, the insurer is on risk for the compulsory third party liability cover, howsoever the business has been priced. The residual concern for customers will be what happens if the telematics device fails. Will it be obvious that it has failed? Will the insurance policy still be legally binding? If the customer has an accident in which they damage (write off, say) the insured vehicle, will this accidental damage still be covered by the policy? Logic would say yes – foul-play aside it would be unfair to the customer not to cover the claim – but the point remains that customers need to be confident that they can rely on their insurance to pay out when they need it, even when the technology needs a reboot.
Accepting the technology
The technology is already there, but its application in a personal lines insurance perspective is still in its relative infancy. Customers are generally not familiar with it, and lack of understanding often breeds suspicion – hardly ideal for the delivery of insurance, which is often cited as a product where the customer does not trust the supplier. As the supply of telematics insurance policies gains in momentum, with reducing costs and greater ease of installation, acceptance of the technology will surely grow. That will take one problem out of the equation. Undoubtedly many more challenges will remain for the expansion of the telematics insurance market, and two of these – data management and how telematics products are offered to the customer alongside traditional products – will be explored in our next two articles.
This article first appeared in the January issue of the Actuarial Post Digital Magazine which can be viewed below.
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