Tag Archives: PAYD

Ready for Telematics? 7 Considerations

Telematics has the potential to dramatically alter the auto insurance industry, from personalized premiums based on individual driving data to automated emergency services and entertainment-based add-ons to more immediate and active management of claims.

Risk Assessment

Value Proposition

Telematics has much to offer both consumers and insurers.

Solution Analysis

Technology solutions available today are similar in terms of what is possible, but there is a difference in the manner that information is collected, delivered and used. When selecting the most appropriate technology solution and provider to partner with, I recommend the following considerations:

1. Telematics Model (PAYD, PHYD, CYD, Embedded): Several telematics models are emerging with varying levels of consumer interaction and integration.

Pay As You Drive (PAYD) is a mileage-based system that has been around for some time in varying forms. A device is installed in the car to validate when and where a car is driven. More advance systems are available now.

Pay How You Drive (PHYD) considers driving style and behavior in addition to collecting mileage and GPS data. The average driver has one accident every 10 to 12 years, but more common are unsafe driving maneuvers that increase the likelihood of an accident. An accelerometer used in the PHYD models can provide event information such as abrupt acceleration, deceleration, hard braking and sharp turning, which help us understand driving behavior and predict accident claims better.

Control Your Driving (CYD) goes to the next level. While PAYD and PHYD models are about collecting data rather than interacting with consumers, therefore passive in nature, CYD uses the data to provide constructive feedback to drivers through mobile or in-vehicle interfaces and potentially improves driving habits. There is sufficient evidence that driving behavior can be improved with feedback. The teen and elderly markets are niches for early adopters of this model.

Vehicles embedded with telematics devices are the long-term aspirations of both automakers and insurers. These systems provide all-around safety and driving assistance. These systems usually include services such as adaptive cruise control, collision warning, lane assistance and blind-spot detection. This model is growing fast in the auto market, driven by the safety benefits of reduced driving risk. New technology can enable additional services and features like safety controls activated when poor road conditions are detected by the GPS. BMW’s connected drive is the first step in this direction. Mobileye is helping autonomous cars “see” via crowdsourcing; the company has outfitted 4,500 NYC Uber and Lyft cars with anti collision technology. Some analysts project that all major manufacturers will have embedded telematics solutions in their cars within the next five years.

See also: Game Changer for Auto Telematics  

2. Data Protection (collection, use, disclosure and storage of personal information): Telematics generates big data. Therefore, the ownership, collection, use, disclosure and storage of data becomes crucial in gaining trust and loyalty.

Privacy: The success of other industries indicates that people are willing to trade some of their privacy in return for the right services, in the right time at the right place. That has proved true in social media, Uber, online credit card use and internet banking. When it comes to telematics, though, the stigma of insurance companies and the fear that data about driving behavior could be misused are causing concern. To overcome this hurdle, we must be as transparent as possible up front, offer the right amount of value-added services and carefully position the offering with the right messages to win over consumers. The telematics solution selected must provide a feasible program that gets appropriate access to driving patterns without seeking access to too much data. Aggregated driving scores, limitations on driving history and GPS use and specialized onboard data analysis functions could mitigate these concerns. As long as we know about driver safety and potential risks, we don’t need to dive deep into consumers’ personal data.

Storage: Dynamically generating data within an automobile or mobile phone creates challenges. The sheer amount of data generated makes it difficult, if not impossible, to store it within the automobile or mobile phone itself. Thus, decisions about what to store, and where, become very important. This issue is amplified by the privacy concern of data storage. In cases where certain pieces of data are not stored within the automobile or mobile phone, the retention aspect of privacy policies becomes important. Once the data is destroyed, there is no way to recover it. Moreover, unlike static data, which is collected only once by any interested party, dynamic data is collected repeatedly by a service provider to keep it up to date. Thus, there has to be a continuous transfer of dynamic data from many vehicles through the telematics service provider to application service providers. This requires an efficient and scalable evaluation of constraints in the privacy policies.

Security: The growth of e-commerce on the web has been limited by the reluctance of consumers to release personal information. 94% of web users decline to provide personal information to websites at one time or another when asked, and 40% who provide demographic data have gone to the trouble of fabricating it. If potential auto telematics users share the concerns of web users, then a large segment of the potential telematics market, perhaps as much as 50%, may be lost. There is significant potential for misuse of data collected. Consumers may substitute false data or hack into vehicle applications. Telematics service providers may sell consumer data to third parties without the permission of consumers. Therefore, telematics applications will be successful if providers know that the data they receive is accurate and if consumers know that their privacy is assured. Data protection must provide both privacy and security protection. Telematics solutions that can achieve that protection while enabling the sharing of data are the most viable options.

3. Ease of Installation (solution access): Complex installation processes (like blackbox installation) result in lack of interest and conversions from the traditional insurance model to the telematics model. AXA launched a mobile telematics solution in some of its international markets but was unsuccessful in acquiring a buy-in from consumers as the app had to be switched on before a drive. Such a solution leaves room for anti-selection and requires additional effort in the day-to-day lives of consumers. Even insurers like Progressive have only managed to convert approximately 20% of their book of business to the telematics model despite more than a decade of marketing initiatives and spending.

4. Ease of Use (interaction and feedback): The telematics solution selected must be intuitive and easy to use for both consumers and insurers. It should help us identify the risk (item that is insured), peril (anything that could cause damage — breakdown, weather conditions, fire, water, ice, road conditions, accident, etc.) and hazards (anything that increases the chances of peril — speeding, hard braking, driving behavior, etc.). The solution must be able to answer questions such as who is driving, how well the person is driving and how much is the car being driven. Mobile telematics solutions must be able to distinguish driving from walking, riding a bike or hopping on a train, bus or boat, for instance. The right solution will employ real-time data analytics and feedback to engage consumers, improve driving safety and facilitate better claims experience and meaningful dialogue with insurers.

5. Accuracy (trust): Our business is built on trust. It is imperative that the telematics solution we implement helps build trust and value in the digital age. Data accuracy is crucial in acquiring a buy-in from consumers, assessing driving behavior, pricing and speed and quality of response during a breakdown or accident.

6. Notifications (auto alerts): Most fleet telematics solutions have failed to create value as the focus has been largely on collection of information alone. Such solutions require someone to run reports, analyze them and understand them before taking corrective actions. This results in delayed feedback to drivers and in most instances becomes reduced to just knowing where vehicles in a fleet are (dots on a map). Automatic notification and alerts facilitate information to be reviewed at the right time, in the right place and by the right person for improved service (safety, accident and roadside assistance) and quality of care.

7. Ease of support (cloud): Cloud-based telematics solutions facilitate the delivery of new or upgraded capabilities without stretching IT bandwidth and keep the total cost of data ownership low. This is imperative if we wish to own the data. If not, then partnering with a solution provider that can maintain and support the solution at scale in an economically viable manner is crucial.

Customer Engagement

Engaging customers to improve driving behavior calls for a change in human behavior.

Humans are not inspired to act on reason alone. You don’t connect with your audience by using conventional rhetoric, which in the business world usually consists of a PowerPoint presentation in which you say “here is our company’s biggest challenge, and here’s what we need to do to prosper,” while building your case through statistics, facts and quotes from authorities. The problem with rhetoric is two-fold. First, the people you are talking to have their own set of authorities, statistics and experiences, so, while you are trying to persuade them, they are arguing with you in their heads instead of being motivated to reach certain goals. Second, if you do succeed in persuading them, you’ve only done so at an intellectual level. That’s not good enough. The theory of rational action that claims human beings are abstract symbol manipulators much like computers that seek to maximize their self-interest has dominated most of the 20th century and is the foundation for major institutions, from stock markets to governments. Research in the last couple of years, though, has led to a profound shift in how we understand human thought and behavior.

Scientists have pieced together enough evidence to know that humans are embodied beings, which means we work the way we do because of the kinds of brains we have, the kinds of bodies we have and the typical experiences that pervade our evolutionary history. We know now how real human nature works (mostly). The big picture is that we are profoundly moral beings, and our behavior is shaped by value judgments, deeply held beliefs and assertions about right and wrong. We are profoundly social, and our behavior is influenced by the behavior of those around us through shared stories, common expectations and need for cooperation (and competition). We make decisions through context-based logic determined by how we understand the situations we find ourselves in and reason with our emotions. Try asking someone on a date without those subtle emotional cues of presence, enthusiasm and appeal.

I believe that something as simple as fun can influence human behavior for the better. In a series of experiments, Volkswagen tested this theory. Check it out…

The speed camera lottery

Can we get people to obey the speed limit by making it fun to do so? The winning idea was so good that Volkswagen, together with the Swedish National Society for road safety, actually made this innovative idea a reality in Stockholm.

Piano Stairs

Can we get more people to take the stairs instead of the escalators by making it fun to do so? Piano stairs created on Odenplan underground station in Stockholm have become a hit in cities worldwide from Milan to Santiago and more.

The way to persuading people and ultimately a much more powerful way is by uniting an idea with an emotion. It comes down to good design in our attempts to change human behaviour and will depend on our understanding of REAL human nature. Knowing where we went wrong in the past and what we know now is right, we can engage and design models to promote socially desirable outcomes like reduction in environmental impact and greater sensitivity to the needs of others.

See also: 5 Value Levers for Auto Telematics  

Using the fun theory to improve driving behavior is a tested formula that has worked globally and one that I would recommend as a first step. Create a competition that is built off recognition and rewards good behavior. Huge, safe-driving campaigns could be turned into beautiful marketing messages that people would be proud to be a part of. The intelligence and data we collect could change the way we do business altogether.

Liberty Insurance: Drive Well from Michael Hanson on Vimeo.


Inventing a future and testing ideas is not enough. To bring auto telematics solution to life, models need to change from actuarial to actuarial plus big data. Implementation will require collaboration between solution providers, underwriters, actuaries and product and marketing teams to create economically viable customer propositions, storytelling and messaging that connects with your audience and keeps their attention long enough to convert.


Companies like Uber and Lyft struggle with public perception and regulations globally. Partnering with them and creating compelling value propositions for their drivers presents an opportunity for efforts in auto telematics to scale quickly.


The winners will be early movers that capture the safest drivers, take advantage of pricing power and strengthen customer relationships while easing privacy concerns.

Telematics: Now a ‘Movie,’ Not ‘Snapshot’

The traditional underwriting of an auto policy is based on a snapshot of certain static variables that belong to the client and his vehicle – the impact and weight on the pricing is determined by the analysis of the claims historical series of the company – and the renewal comes after taking the same type of snapshot after 12 months.

Telematics is becoming more and more used as a way of changing this approach and going more toward an individual pricing of risks, which uses a “movie” of the client’s driving: Already today, more than half of the products that have a black box and that are present on the Italian market have a usage-based (UBI) tariff. (The rest of these products do not have any variable component linked to telematics information, only an up-front flat discount.)

The ways in which telematics data can be used within the tariff mechanism fall into three main categories:

  1. Telematics can be seen as an option on the existing tariff or as a stand-alone product;
  2. The client’s value proposition can be “real individual pricing” applied during the first year, or a fixed discount for the first year and the “promise of a discount” at renewal based on the driving behavior in the previous 12 months;
  3. Variables can be incorporated within the tariff, either referring only to the distance traveled (“pay as you drive”) or can also take into consideration a wider range of data regarding the driving behavior (“pay how you drive”).

Pay as you drive (PAYD)

This type of product prices based on distance traveled and represents the most commonly used UBI tariff approach on the Italian market: around 80% of UBI products currently use a “kilometer” approach.

This approach focuses on a pretty wide niche and is based on a discount created especially for those clients who don’t use their cars often: For example, California-based Metromile starts from the client’s profile – based on traditional static variables – to determine the monthly fixed cost and the fee per kilometer; then, each month, Metromile measures with the box the “amount of risk exposure” (number of kilometers) and charges accordingly. Product innovation is moving toward assigning a different importance to the kilometers traveled based on the time of day and the type of road.

Looking at the PAYD solutions in Italy, in 30% of the cases telematics is an option on traditional policies and in 40% of the cases there is some form of adjustment of the premium during the first year.

Pay how you drive (PHYD)

This approach exploits the true telematics potential to define the adequate price for each client, based not only on the “amount of exposure to risk” but the “real level of risk,” based on actual driving behavior. PHYD also brings major benefits by influencing driving behavior and by allowing for the acquisition and retention of less risky customers. In addition, insurers can switch from a niche approach to one that can be applied to the whole portfolio. Studies show that the ability to discriminate about risk is highly elevated. The 10% of clients that are identified as riskiest on the base of behavioral telematics account for 40% of total claims, while identifying the riskiest 10% based on traditional variables usually intercepts only 25% to 30% of claims.

A very interesting example is the policy launched recently by Direct Assurance (Axa Group) in France: The product includes a self-installing telematics box that is sent to the client’s home. The client’s cost is adjusted from month to month based on her driving behavior (it may vary between plus 10% and minus 50% with respect to the first month’s premium).

The range of variables that are considered is wide. They start with traveled kilometers (having a different weight based on road type, time of day, day of the week and weather conditions). They move on to the intensity and length of braking, cornering and acceleration; respecting of speed limits; time spent behind the wheel; familiarity with the roads; and any use of the mobile phone while driving.

It becomes clear how the growth of this type of solution – which today still represents only a small part of the millions of telematics insurance policies that are in circulation worldwide – will make the ability to extract insights from big data the key element of the competition among insurance companies.

This article originally appeared in the Insurance Daily n. 738 Edition.

5 Value Levers for Auto Telematics

Telematics could be one of the most relevant digital innovations in the insurance industry, directly affecting results. Worldwide diffusion of telematics-based motor insurance policies is currently at an early stage, but the best practices achieved levels of penetration higher than 20% of the motor portfolio. The diffusion is growing fast, with well-recognized benefits for the motor insurance value chain.

Looking across countries at best practices, it is possible to identify five value-creation levers:

  1. Risk selection
  2. Pricing (risk-based)
  3. Value-added services
  4. Loss control
  5. Loyalty and behavior modification programs

1. Risk selection

Telematics can be indirectly or directly used to select risks at an underwriting stage. As a matter of fact, products subjected to steady monitoring through telematics indirectly discourage purchase by risky clients, hence limiting adverse selection and fraudulent intent.

Data collection can directly improve the overall quality of the underwriting process, allowing price adjustments or covenants and options related to what the monitoring finds.

For instance, Progressive’s Snapshot provides:

  • a device that measures client driving style;
  • a predictive approach based on data collection;
  • a discount based on information gathered.

2. Pricing (risk-based)

Through telematics, a steadfast monitoring of “quantity” and “level” of risk has become possible. The risk can be calculated on the basis of information monitored continuously, directly determining pricing for individual customers. This may cover usage. Premiums can be adjusted within the year the policy covers, or there can be a discount the following year.

There are solutions such as PAYD (pay as you drive) policies that monitor mileage (with different weights for different time and itineraries) and compute a premium adjustment. PHYD (pay how you drive) policies, instead, integrate information gathered on mileage with an analysis of the client driving style, defined through both mileage and driving behaviors (the number and the intensity of accelerations and stops, driving timetables, speed and other variables).

3. Value-added services

Value-added services can be offered to the insured by the insurer or partners to exploit data detected and sent via telematics. Some examples related to the automobile business are:

  • Car antitheft systems through an installed back box;
  • Emergency services with automatic claim detection or buttons for direct-dialing the assistance center;
  • The possibility to link the telematics device to a payment system (and confirm via smartphone app) to authorize all car-related transactions, such as parking, tolls and refueling.

4. Loss control

Telematics — based on a box installed within the car — also allows for the use of data detected by sensors to limit the loss ratio of the motor portfolio. In this sense, telematics enables the development of claims management processes that are faster and more efficient, by anticipating:

  • The actual verification of the claim (anticipation of the first notice of loss);
  • The direct contact with the client for description of the claim;
  • The attempt to use agreed body shops.

The use of structured information coming from telematics sensors optimizes claim evaluation, improving fraud detection and providing more information during any eventual in-court processes.

5. Loyalty and behavior modification programs

Behavioral programs are basically approaches that exploit information gathered on comportment to direct clients toward less risky solutions.

This can be fairly achieved through the inclusion of telematics devices and measurement of risky behaviors.

Discovery’s Vitality Drive has applied this approach with a proposition based on:

  • “Black box” requested by the client to have access to the loyalty system, with a monthly fee;
  • Drive style monitoring and reporting through feedback;
  • Incentives for other “virtuous behaviors” (car maintenance, driving courses, …);
  • Cash-back fuel expense, related to the score of the driving style and of other monitored behaviors.

The telematics business evolution — from a niche underwriting solution focused on younger and low-mileage drivers to a mainstream solution broadly applied on motor portfolios — requires the creation of an integrated approach based all the five levers. This approach has the potential to be a real game changer in the motor insurance business.

car insurance disruptive

Cars: What’s Driving Disruption and Change

The SMA research report The Next-Gen Insurer: Fueled by Innovation identified the major influencers within and outside the industry that are reshaping the business of insurance. It cautioned that if insurers chose to ignore, or even put off, the inevitable need to change along with the rest of the world, they would be taking a chance and creating risk for the survival of their businesses. Well, as it turns out, ignoring it is no longer an option.

The new SMA research report, The Changing Auto Insurance Landscape: Influencers Driving Disruption and Change, underscores that disruption to the auto insurance industry is inescapable. Multiple influencers have converged, primarily from outside the industry, and are in the early stages of transforming the automobile industry and subsequently the auto insurance business. The new examples like driverless/autonomous vehicles, the connected car, car apps and shared transportation are disrupting traditional business, risk, product, pricing and customer assumptions while setting off the first wave of a broader disruption that will challenge the industry. Together, they reveal a growing wave of disruption in the auto insurance segment. This was emphasized by the announcements made at the Consumer Electronics Show (CES) in Las Vegas in early January 2015.

Insurers reward customers with discounts for multiple auto policies, offer discounts for pay-as-you-drive (PAYD) or pay-how-you-drive (PHYD) programs and offer more discounts for additional coverage such as homeowners, umbrella, or others. The same is true for commercial insurance – business owners will look for a package of insurance that includes bundled discounts.

But consider what Mark Fields, Ford’s CEO, noted to the media at the 2015 CES show. Fields sees Ford as a mobility company rather than an automotive company, delivering a wide array of services and experiences via the auto instead of the mobile phone. This reimagined business model will have rippling effects across other industries, including insurance.

So how will insurance see itself going forward? How will insurance reimagine itself? The impact will drive insurers to think bigger and reimagine their businesses as they ride this wave of change toward becoming a Next-Gen Insurer.

The transformational potential of each influencer individually is great, but when combined they are game-changing. Each is individually beginning to disrupt insurance in varying degrees by redefining or reducing risk; redefining vehicle needs and uses; creating product and service needs; and affecting traditional revenue, pricing and operational models. Even more importantly, influencers are reshaping customer expectations by providing new experiences to create, retain and grow customer relationships and loyalty. Here are some potential implications for insurance:

  • Will insurance models move away from the driver to the vehicle or manufacturer?
  • What new services can be provided based on connected car or smartphone applications to engage with customers differently?
  • Will auto driver usage data come from Google, Apple and auto manufacturers rather than traditional industry data providers? Will this new data redefine risk, pricing and underwriting models?
  • Will insurers need to rethink partnership strategies to deliver new services?
  • How will risk models and ultimately pricing models be affected?
  • How will these affect operational, unit cost, revenue and profitability models?

The last two questions are especially significant based on the changes that are already happening in driverless/autonomous vehicles, the connected car, car apps and shared transportation. Using some of the statistics and projections from these examples featured in the new report, the hypothetical potential financial impact on auto premiums is profound. Collectively, the impact to the top 10 personal auto insurers that represent 70% of the direct written premium (DWP) could put 60% of existing DWP revenue into play. What’s more, this does not include potential lost revenue because of new products and services that may be offered by other companies and industries.

Even if the impact is only half of this, the operational and profitability models based on historical auto insurance assumptions are significantly disrupted. And those assumptions are starting to become irrelevant. Rather than waiting for automotive, technology and other industries to determine where this revenue will go, insurers must begin to plan today.

Another inevitable result will be felt in the traditional customer relationships that will be further challenged by the emergence of new services and providers around the shared economy, connected car and driverless vehicles. Opportunities to strengthen customer relationships will be strained and diminished as these companies redirect customer relationships and revenue away from traditional insurers.

The impact of these influencers; the emergence of new services; and their effects on customer relationships, old business models and revenue and profitability models are causing insurers to seriously consider these underlying, but very strategic questions: How are insurers going to recapture the disrupted revenue stream? Will it be through new products and services that generate new revenue in new ways? Will insurers become product manufacturers/underwriters for these emerging companies? Or will insurers adapt and become broader providers of insurance and service capabilities? How will you retain customer relationships and loyalty within this disruption? Are you preparing scenarios and plans to respond to these changes over the next three to five years?

These changes have uncovered a challenging new business landscape. The inevitable disruption of auto insurance is taking the industry in new and surprising directions. How you respond is strategically important for your companies’ relevance and competitiveness. So, fasten your seat belts! It is going to be a fast and interesting ride!