When Norwich Union put its pay-as-you drive insurance scheme on hold some observers concluded that it was just one of those ideas, like the hovercraft, that catch the imagination but ultimately disappoint. Julian Beardsworth of EMB thinks otherwise. He believes that telematics-rated motor insurance is inevitable, desirable and will appeal to customers. Here are his ten reasons why
1. It works
All drivers can spot high-risk driving both in themselves and others. Reckless, unskilled and over-cautious driving are dangers that can be observed every day. So it’s hardly surprising that using telematics to monitor when, where and how we drive can differentiate high-risk from low-risk drivers to a remarkable degree. Norwich Union reported a 30% drop in claims costs for telematics, which implies that it doubled the quality of risk assessment. Any insurer having twice the ability of its competitors to underwrite and price risk can take the market by storm.
2. It’s getting cheaper and cheaper
Everyone is familiar with the reality of “Moore’s Law” that computer processors double in power every eighteen months. Similar observations have been made about data transmission capability and data storage. At the same time, computer costs are reducing in real terms. EMB’s observation is that telematics hardware and data transmission costs reduce by a factor of six every five years. A telematics device that cost £300 in 2003 could be delivered for £50 in 2008 and is heading for £8 in 2013. At some point soon the economics switch to “why wouldn’t you?” rather than “why would you?”.
3. DIY installation
Up to now the cost of installation has been prohibitive, but not any more. A solution has been found in the form of a device that is mailed to the customer and simply plugs into the OBD II port – a standard on cars sold in the EU since 2000.
4. DIY re-installation
And when people change their cars the telematics device unplugs from one and plugs into the other – it sounds trivial but is another massive shift in the economics of telematics.
5. Telematics doesn’t have to be invented in the UK
High-risk and low-risk driving look the same the world over. So, when an insurer cracks open telematics risk assessment in an insurance product in the US or Germany or South Africa, it could very soon migrate. Telematics technology could easily move into the “plug and play” space in the UK and everywhere else, and it would require little or no modification. It only takes someone somewhere in the world to make it work for it to come to the UK.
6. And that someone might just be Progressive in the US
Progressive may have already cracked it. Progressive are a focused motor insurer and one of the largest players in the US market. They’ve had two forays into telematics on a pilot scale, but now they’re rolling out a telematics product countrywide – authorised and selling in ten states and counting. Of course, they could be calling the industry’s bluff, but they have a strong track record of successful innovation. Insurers doing nothing about telematics today are effectively betting that Progressive will fail.
7. Customers like telematics
Safer drivers know who they are and will buy telematics so that they can benefit from their lower risk rating. The threats to privacy cited by politicians and the media are politically correct and perceived to be populist – but everybody knows that simply carrying a mobile phone already reveals your location. And the protection given to data by law is something that no commercial enterprise can afford to let slip. How many times have details about the location (as opposed to the content) of a mobile phone call made for embarrassing headlines? I can’t remember a single instance.
8. It makes driving safer
People drive more safely when they are being monitored. The evidence so far is that cars with telematics have fewer accidents. The very fact of being observed brings about improvement. I’ve had telematics in my own car and, yes, it changed the way that I drove.
9. It decommoditises motor insurance and improves customer relationships
Individual customers will ultimately get individual prices with telematics insurance products, using personalised data. And the way that customers are identified as suitable for telematics will encourage behavioural and values-based marketing. This offers insurers a platform on which to build stronger customer relationships.
10. It cuts claims costs
Having details of the time, speed and driving actions can help claims handling. Fraudulent whiplash claims from third parties have been successfully challenged by demonstrating that the collision was at a snail’s pace. Stolen vehicles can potentially be tracked down. Disputes over liability will be simplified.
Julian Beardsworth is a director at EMB, the actuarial and business consultants.
Julian.Beardsworth@emb.com
Some other EMB posts:
2. Telematics in the fast lane (a briefing paper)
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