The fusing of analytics and location-based technologies offers many advantages for insurers.A portmanteau of the words telecommunications and informatics, telematics describes the increasingly prevalent array of technologies that merge analytics with mobility. For insurers, telematics is the technology that underlies pay-as-you go insurance policies. Insurance Networking News asked Joseph Reifel, partner at Chicago-based management consultancy A.T. Kearney, about the challenges and benefits telematics present to the insurance industry.
INN: What areas might be most suitable for early adoption of telematics and might meet with most social acceptance and least resistance?
JR:While telematics is well suited for personal auto insurance overall, acceptance is greatest in commercial fleet and teen insurance markets. It is well established in commercial fleets to improve asset utilization, reduce fuel consumption and improve safety, and companies have greater flexibility on consumer privacy issues. Insurers such as American Family have focused telematics offerings on teen drivers, where accident risk is highest and parents monitor their children's driving more closely to improve safety.
Rising awareness of the technology and better value propositions offered by insurers is leading to a wider acceptance of telematics, so the offering is increasingly going mainstream. Progressive is rolling out its third-generation offering, Snapshot, and other major insurers such as Allstate have recently entered the market.
INN: Are there any technical barriers to wider use of telematics in insurance?
JR: The barriers are not so much technical, but more about the cost and convenience of installation. That said, device costs have fallen by 50% in the last two years, and OEMs are also helping to reduce technical barriers by increasingly embedding telematics in vehicles. Close to 40% of 2010 model year vehicles in the United States have embedded technology. In addition, the devices themselves are getting less intrusive and easier to install.
Looking forward, mobile devices hold promise as a viable aftermarket alternative to telematics, given their increasing sophistication and the prevalence of accelerometers in smartphones. A key ongoing challenge is the lack of standardization of data and auto platforms. However, open platforms such as MeeGo are making significant strides in this area through partnerships with automotive and technology players.
INN: Does the use of telematics require a significant capital investment?
JR: No, but it does involve additional acquisition costs (device and installation) as well as operating costs (telecom, data and customer service). Insurers may also see a short-term profitability impact, and limits on their ability to increase the price for risky drivers to offset the discounts offered to safe drivers.
Reduced risk from attracting safe drivers and improvements in driving behavior should offset reductions in the premium. Active claims management can shorten the claims lifecycle and further reduce losses. The ability to enter new markets and offer additional services can further grow revenue. The leading insurers will understand these unique economics and their impact on loss ratio, profitability and growth.
INN: Are there any consumer privacy and regulatory issues that could impinge on the use of telematics?
JR: While consumer privacy issues will continue to present a hurdle for the adoption of telematics, recent trends suggest that when customers are provided with sufficient value and adequate safeguards (e.g. Progressive's Snapshot program provides discounts to safe drivers, and removes the "monitoring" device after a set period of time) there is a strong willingness to adopt the offering. Research shows more than 30% of consumers indicating interest in a usage-based insurance offering.
Regulatory issues have a mixed impact on telematics. Factors likely to delay adoption include privacy legislation, the fragmented, state-based regulatory environment and state insurance requirements that compromise insurers' ability to effectively deploy telematics or protect their IP. For example, California restricts parameters that can be used in pricing, while Illinois requires public disclosure of underwriting models.
INN: Can existing insurance products be retrofitted for telematics, or is a clean slate approach best?
JR: Depends on timing-in the short run, insurers are likely to use telematics to augment existing product pricing models. New information on how much, when and how a customer drives will provide insurers with the ability to augment current models and adjust prices to more accurately reflect risk. Over time, as the value chain and regulatory infrastructure matures and insurers become savvy with using and integrating telematics into their operating model, fundamental change is likely.
Extended or revamped pricing parameters will reflect how a customer drives, as well as other relevant data such as external driving conditions. Product pricing will become more personalized based on the characteristics of the individual customer, in conjunction with many of today's indirect predictors of risk.
