By Louis Rumao
Telematics, the interdisciplinary field that covers telecommunications, vehicular technologies, road transportation, road safety, electrical engineering which includes sensors, instrumentation, wireless communications, etc., is transforming the relationship between consumers and automotive insurance industry.
The century-old automotive industry has been deploying innovations to make vehicles faster, safer, and more comfortable. However, the automotive insurance industry started to evolve only recently. Drivers buy auto insurance, mostly because it is mandatory, to protect themselves against damage to their vehicles and to cover liability for damage caused to others. In the US, it costs about $1200 a year for insurance coverage for an average sedan. Of course, that price tag varies based on the driver’s record, the type of car and even where the driver lives.
Pricing: Traditional Model
Determining how much one pays for auto insurance is complicated – probably like determining airfares! Traditional auto insurance relies on actuarial studies of aggregated historical data to produce rating factors that include driving record, credit-based insurance score, personal characteristics (age, gender, and marital status), vehicle type, garage location, vehicle use, previous claims, liability limits, and deductibles. In general, the following categories tend to influence car insurance premium the most:-
Driving record and accident history
Age, gender, and marital status
Location of residence (city vs. suburb vs. rural)
Make and model of vehicle
One’s financial credit worthiness, how one uses the vehicle and the prior insurance history, though to a lesser extent, are also factors that affect insurance premiums. This is a static or reactionary model of setting insurance premiums, and may be unfair to some drivers.
The New Model
Usage-Based Insurance (UBI) is a recent innovation by auto insurers that more closely aligns driving behaviours with premium rates for insurance. Insurance telematics collects driver and vehicle behavior, analyzes that data, and use them to improve policyholder risk modeling, reduce costs, and better attract and retain policyholders.
Mileage and driving behaviors are tracked using odometer readings or in-vehicle telecommunication devices (telematics) that are usually self-installed into a special vehicle port or already integrated into the original equipment installed by car manufactures. The basis of telematics auto insurance is that a driver’s behavior is monitored directly while the person drives.
These telematics devices measure a number of elements of interest to underwriters: Miles driven; time of day; where the vehicle is driven (GPS); rapid acceleration; hard braking; hard cornering; and airbag deployment. The level of data collected generally reflects the telematics technology employed and the policyholder’s willingness to share personal data. The insurance company then assesses the data and charges insurance premiums accordingly. For example, a driver who drives long distance at high speed will be charged a higher rate than a driver who drives short distances at slower speeds. With UBI, premiums are collected using a variety of methods, including, debit accounts, direct billing and smart card systems.
The first UBI programme surfaced in the US about a decade ago, when some insurance companies began to offer mileage-linked discounts through combined GPS technology and cellular systems that tracked miles driven. These discounts are often combined with ancillary benefits like roadside assistance and vehicle theft recovery. Recent accelerations in technology have increased the effectiveness and reduced the cost of using telematics, enabling insurers to capture not just how many miles people drive, but how and when they drive too.
Telematics devices collect many driving behavior data points and the list grows daily as the telematics features improve. The number and variety of data points available to insurers to optimize pricing models expands as telematics devices evolve. Common data points include: Location; speed; cornering and braking severity; trip duration; road type; distance and direction.
The data collected are only useful if they can be translated into actionable insights an insurer can use to improve business outcomes. The collected vehicle data are analyzed to identify driving behaviors that indicate risk. A score can be assigned to signify to an insurer the relative risk of each driver. Telematics suppliers translate available data into actionable information the insurers can use to identify risky behavior. Common risky behaviors include: Night driving; frequent driving; frequent hard breaking or acceleration and distracted driving. Event Data Recorder (EDR) Black Boxes, which could be built-in, or supplied by insurance companies, collect the data.
Pricing Through UBI
The pricing scheme for UBI deviates greatly from that of traditional auto insurance. UBI has the advantage of utilizing individual and current driving behaviuors, rather than relying on aggregated statistics and driving records that are based on past trends and events, to make premium pricing more individualized and precise. UBI programmes offer many advantages to insurers, consumers and society.
According to Rob Martin, North American Operations Director, Octo Telematics, “Insurance companies can improve their profitability by 20 percent, while most drivers can enjoy up to 30 percent reduction in their premiums, while reducing typical claim processing time from 25-30 days to less than 15 days”.
This increases affordability for lower-risk drivers, many of whom are also lower-income drivers. It also gives consumers the ability to control their premium costs by encouraging them to reduce miles driven and adopt safer driving habits. Less miles and safer driving also aid in reducing accidents, congestion, and vehicle emissions, which benefit society.
The use of telematics helps insurers more accurately estimate accident damages and reduce fraud by enabling them to analyze the driving data (such as hard braking, speed, and time) during an accident. Additionally, the ancillary safety benefits offered in conjunction with many telematics-based UBI programmes also help lower accident and vehicle theft-related costs by improving accident response time, allowing for stolen vehicles to be tracked and recovered, and monitoring driver safety. Telematics also allow fleet to determine the most efficient routes, saving them costs related to personnel, gas, and maintenance.
The practice of tracking mileage and behavior information in UBI programmes has raised privacy concerns. As a result, some States have enacted legislation requiring disclosure of tracking practices and devices. Additionally, some insurers limit the data they collect. Although not for everyone, acceptance of information sharing is growing as more mainstream technology devices (such as smartphones, tablets, and GPS devices) and social media networks (such as Facebook and Twitter) enter the market. Implementing a UBI programme, particularly one that utilizes telematics, can be costly and resource-intensive to the insurer. Insurers must also manage regulatory requirements within the States that they do business. Many States require insurers to obtain approval for the use of new rating plans.
UBI is poised for rapid growth in the US. About 70 percent of all auto insurance carriers are expected to use telematics UBI by 2020. Telematics-based UBI growth is being propelled by technology advances, which continue to improve the cost, convenience, and effectiveness of using telematics devices. It is through the use of telematics that insurers are able to collect driving data that better enable them to link more closely a driver’s individual risk with premium.
Through the UBI programmes, insurers are able to differentiate products, gain competitive advantage, and encourage safe driving. Recognition of the social benefits and growing consumer acceptance of personal data collection will only serve to increase demand for telematics-based UBI products in the future.