Editors' Cuts

Why Telematics Will Move the Industry

Bill Kenealy
Insurance Experts' Forum, September 16, 2011

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.

Readers are encouraged to respond to Bill by using the “Add Your Comments” box below. He also can be reached at william.kenealy@sourcemedia.com.

This blog was exclusively written for Insurance Networking News. It may not be reposted or reused without permission from Insurance Networking News.

Comments (2)

Interesting piece. While I agree with Tom Kavanaugh about the potential efficiency and opportunity across the insurance value-chain for insurers, from the consumer standpoint, there are many issues to consider, not the least of which is protection of privacy. That notwithstanding, those insurers unable to afford or otherwise avail themselves to telematics technology will ultimately underwrite only those risks who find the traditional pricing model more favorable to their driving patterns, thereby reducing the number of risks on the preferred end of the scale. Can we spell A-D-V-E-R-S-E selection? Also, Bill, it would have been a good thing to actually check the math of the "experts" before going to print. Jim Noble says there are 30,000 car-crash deaths a day or 1.3 million per year. Well, 30,000 x 365 = 10,950,000, according to my calculator. It would be a good thing to get the numbers right, particularly since math is the nucleus of what we're all talking about here, isn't it?

Posted by: Guzco | December 5, 2011 2:19 PM

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Bill, very interesting article. I agree wholeheartedly that Telematics will have a profound impact on pricing and products, an effect that, as you say, will likely "eat" exisiting business models. Usage-based products such as auto will be much changed.

A key and highly-disruptive impact will be derived from the potential for first-movers to be able to cannibalize the book of business of those companies that either cannot afford or cannot currently support usage-based insurance (UBI) offerings. The result will be an across the board re-pricing of premium that leads to the loss of preferred customers - low-mileage, lower risk - to companies that are quicker to offer UBI/PAYD options, and higher rates for the remaining higher-risk policies. Insurers' books of auto insurance that are usually so finely balanced will become unstable.

Hollard Insurance executive Roger Grobler, whose company offers both telemetry and non-telemetry PAYD, has spoken compellingly of this conundrum for the slow movers. He likens it to the concept of Prisoners Dilemma, a game theory problem, and his explanation I have detailed in a recent blog entry at blog.exigeninsurance.com.

The end result for slow-movers is that as their low mileage drivers start abandoning them, their book becomes unbalanced. They have less low mileage drivers to cross-subsidize their high mileage drivers. Over time their margins will erode significantly. A business model disruption indeed.

Posted by: Kevin Haydon, Exigen | October 17, 2011 5:31 PM

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