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
- Risk selection
- Pricing (risk-based)
- Value-added services
- Loss control
- Loyalty and behavior modification programs
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:
2. Pricing (risk-based)
- a device that measures client driving style;
- a predictive approach based on data collection;
- a discount based on information gathered.
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:
4. Loss control
- 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.
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.