The rise of telematics presents a number of competitive challenges to auto insurers, including premium and profit erosion, threats to their business models, privacy concerns and regulatory considerations, but also a path to differentiation in a market that has been primarily price-driven, according to “Telematics: Driving the automobile insurance market through disruption,” a new white paper from Deloitte.
U.S.-based insurers have been slow to embrace the technology for a variety of reasons. In addition to those above, for example, Progressive, an undeniable market leader, has been aggressive in asserting patents claims. The technology is used by just 2 million drivers in the United States, who have agreed to use it in exchange for discounts, but 44 million users in Europe are projected by 2017, according to ABI Research’s study, “Insurance Telematics.”
“This industry seems to be slow and cautious and highly conservative when it comes to change,” says Stephen Packard, director, Deloitte Consulting LLP. “But telematics has the potential to do for automotive underwriting what digital cameras did for the film manufacturing industry. It’s a fundamental change, driven by technology, that goes to the heart of the business.”
The Deloitte paper describes an environment in which consumers, driven by a desire for discounts, the commoditization of auto insurance products and diminishing privacy concerns, rapidly adopt and soon demand telematics technology. It also offers a path for insurers to engage it.
Deloitte recommends a staged approach:
• Identify options and define strategy, assessing opportunities and options while paying attention to the business case and profit model
• Develop and pilot UBI offering 1.0, multiple pilots with different offerings are not unusual
• Refine and rollout, use lessons learned from pilot and roll out according to roadmap and objectives
• Advance and expand; lessons will support use of advanced analytics and more comprehensive data
For early adopters, the device is one of the biggest hurdles.
“The challenge is that there is an element of non-insurance activity that has to occur in order to gather the data for rating purposes,” Randy Birchfield, Allstate VP of product operations. “In essence, insurance companies have to get into the device business and we have to get into the business of transmitting data through the airwaves.”
To analyze the data, it first must be acquired, which then leads to buy/build or partner questions, Birchfield explains. “10 years from now, these issues may be gone, as car manufacturers embed this technology in vehicles and the fleet gets replaced. But in the short term, the insurance industry is struggling with how we get the data and whether there are good standards in place to make sure that if we head down one path, the industry doesn’t change paths on us. It’s VHS versus Beta, and it could be a number of years before that issue is decided.”
Telematics technology is quickly becoming commoditized. At wholesale, telematics devices currently cost about $85 and retail for about $150, but those costs would ratchet down considerably as consumer demand rises and carriers make the service more widely available, and several companies are doing exactly that. Progressive is making the technology available to non-customers, for example, and wireless carrier Sprint is offering a three-month Jump Start UBI Trial Program that would enable all insurance carriers to evaluate the ROI of Integrated Insurance Solutions from Sprint.
“There’s a confluence of market forces driving this that are unstoppable,” says John Lucker, principal, Deloitte Consulting LLP. “You have an industry that has been pushing price, price, price, price, as the message to consumers. But now you have a way to tie price to driving behavior. And beyond that, you have the opportunity to enhance service as a point of differentiation.”
When a policyholder gets into an automobile accident, the burdens associated with that claim fall on the policyholder, Packard explains. That user experience could lead to a more robust relationship with customers at the moment of truth, which is when an accident takes place, he adds.
“They need to notify emergency services, they need to get the car towed, find out where to take the vehicle for repairs, get the estimates, and on and on. In a telematics environment, that could change significantly because when the accident occurs, it could immediately send a signal to the insurance company that dispatches the emergency services, contacts the driver of the insured vehicle to determine if they need medical treatment, immediately notify the claims adjuster. You could set up a new claim file automatically. It would have the policy information available to match up with the telematics data. And therefore the process would be largely transformed.”
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