Last month Netscape founder and venture capitalist Marc Andreessen published a thought-provoking essay in the Wall Street Journal about the propensity of software to “eat” existing business models and even entire industries whole.
This cataclysmal aspect of emerging technologies was much in mind for me last week at the Telematics Update’s Insurance Telematics 2011 Conference here in Chicago. In the context of insurance, telematics is the fusion of telecommunications hardware (GPS, wireless) with traditional information gathering and analytics technology. The ascent of telematics has meant that forward-thinking auto insurers have been able to offer insured usage-based or pay-as-you-drive policies, with Progressive’s “Snap Shot,” State Farm’s “in Drive” and Allstate “drivewise” programs being prime examples.
Mirroring one of the primary value propositions of cloud computing, PAYD drivers cede a modicum of control for the promise of lower rates. For example, the increased transparency to raw data affords insureds a chance to manage their premiums much in the way they currently manage cell phone minutes.
The value proposition of telematics for insurers is more varied and potentially disruptive for commercial and personal lines auto insurers. During a panel discussion, Tom Kavanaugh, director at PWC, noted that telematics can impact a wide swath of insurance operations from product development to policy administration to claims. “The advance of telematics opens up a wide spectrum of opportunities across the insurance value chain,” he said. “Not only can insurers price more efficiently, but there is a chance to redefine the customer experience.”
Perhaps no insurance business process is more overdue for a disruptive technology than the claims process. Kavanaugh says telematic-equipped vehicles raise the possibility of insurers finding out about accidents as they occur. This prospect gives rise to insurers investigating claims at accident scenes before vehicles have been moved. In addition to ultimately getting customers paid faster, which increases customer satisfaction and retention rates, Kavanaugh said there are other benefits to introducing telematics into the claims process. “There are opportunities to decrease cycle time for claims, and that has many positive impacts for insurers by reducing investigation costs and reducing opportunities for fraud,” he said. “Our research shows that when FNOL exceeded one day, the average claims payout went up 20%.”
Jim Noble, line of business director – Motor Fleet, Zurich Services Corp. foresees telematics engendering an even more profound shift for insurers: moving from compensating insureds for accidents to actively helping prevent them. Indeed, as technologies such as vehicle-to-vehicle communications mature, the possibility of a “crash-free” culture is possible. Noble says one of the primary obstacles to establishing a crash-free culture, is cultural. While the public, and to a large extent insurers, feel there is no acceptable amount of deaths due to, say, house fires, people seemed resigned to regard car crash fatalities as an acceptable side effect of mobility. “Globally, there are 1.3 million deaths annually due to car crashes, that's 30,000 per day,” he said. “If this were a traditional disease, we would be having telethons to stop it. Why should we accept deaths in car crashes? Why not zero? An accepted risk is a great obstacle.”
Before telematics is widely used to mitigate accidents, a bevy of technical and business concerns remain to be addressed. One issue revolves around communication standards. Will the wireless component of telematics use 2G, 3G or 4G technologies? Another weighty question is who will “own” telematics. In addition to insurers, auto manufacturers and telecommunications firms are essential to the equation. With some 230 million vehicles on the road in the U.S. alone, there is bound to be a variety of solutions employed until some standards emerge, if they do at all. Indeed early adopters, be they Progressive or GM, may not wish to forfeit the competitive advantage they gained as early adopters by pushing for a common standard.
Another potential sticking point is consumer pushback concerning privacy and the sense their actions are being constantly monitored. Here Kavanaugh says Progressive’s strategy with Snapshot is instructive on how to allay drivers’ fears of Big Brother. “Because they have been at this for 15 years and have a deep repository of [driver] data, they can now offer a product that takes a snapshot at point-in-time instead of ongoing monitoring,” he said.
Kavanaugh’s colleague, PWC Principal Jamie Yoder, agrees that as the technology matures privacy concerns will be assuaged. “The success of companies such as Progressive is demonstrating that telematics has broad appeal,” he said. “Like a lot of technologies, we tend to overestimate them in the short-term and underestimate them in the long-term.”
Bill Kenealy is a senior editor for Insurance Networking News.
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