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July 19, 2018

How to Address the Rise in Auto Claims

Summary:

The answer is as simple as the smartphone. Sensor data from it can stratify driver risk eight times better than credit scores.

Photo Courtesy of Pexels

The National Safety Council reported a 14% increase in fatal auto accidents between 2014 and 2016, reaching the highest total since 2007. More accidents lead to more insurance claims, and thereby more payouts from insurers. As a result, insurers are striving to more accurately measure and stratify the risk associated with their customer base to help lower claims and increase profits. Unfortunately, it’s difficult to accurately assess risk, and many insurers are stuck using traditional methods to determine rating policies.

For years, insurers have used factors like credit score, age, gender and location to set rates, but these traditional factors are not adequate alone to accurately stratify the customer base by risk. When insurers began to use credit score, they were pleased because drivers classified in the riskiest decile based on credit cost two times more to insure than those in the lowest risk decile. Although a 2x lift may seem significant, it pales in comparison to what can be achieved using modern technology to directly measure driving behavior. In particular, data shows that, by using smartphones to measure distraction, at-risk speeding, harsh braking and other factors, smartphone telematics can provide a 17x lift from lowest to highest deciles in terms of crash risk.

See also: Distracted Driving — an Infographic  

Using smartphone sensor data – and thereby leveraging technology their customer base already possesses – insurers can more accurately measure and analyze driving behavior, and use this information to stratify risk and set pricing based on driving performance. This also aligns with what consumers want. A recent survey revealed that only 20% of respondents had full clarity on how their insurance providers set prices, which seems out of touch given consumers’ overall push for transparency across industries. What’s more, 73% of drivers surveyed want insurance rates based on how they drive, not traditional factors such as gender, age or income level.

Despite the significant benefits of adopting a smartphone telematics program, some insurers have been hesitant due to concerns about customer adoption, user satisfaction and ease of implementation. For example, survey respondents indicated that only 22% had ever been offered such a program by their insurer. Considering that 75% of drivers said getting a discount from an insurance provider would motivate them to be a better driver, it is time for insurers to put their concerns aside and try offering a smartphone telematics program.

See also: It’s Rush Hour in Telematics Market  

Not only can these programs help insurers assess risk, but they can help build a loyal customer base dedicated to safer driving, because smartphone telematics apps offer a way to engage with customers through gamification features and real-time feedback. These features have been shown to help change driver behavior for the better: One insurer saw 74% of their drivers improve. Among these drivers, there were 47% fewer claims and 48% less-severe claims.

By extracting behavioral risk factors from smartphones – a modern, ubiquitous technology – and combining them with traditional assessment factors, insurers can achieve better risk stratification, set more accurate rates, reduce the quantity and severity of claims and improve loss ratios. Also, by implementing a comprehensive smartphone telematics program, insurers obtain a direct channel to their customers, where they can engage to improve driving habits and increase loyalty to the insurers’ brand.

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About the Author

Sam Madden is a professor of computer science at MIT and the director of big data @CSAIL, an industry-university collaboration to explore issues related to managing data that is too big, too fast or too hard for existing data processing systems to handle.

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