How Telematics Insurance Will Change the Way We Drive in the Next 5 Years

Telematics is a technology trend that is currently under the spotlight in the connected vehicle landscape. While offering an enticing suite of benefits to automotive OEMs, telematics also promises many conveniences to car owners. And telematics insurance is, undoubtedly, one of them.

What is Telematics Insurance?

Telematics insurance is a form of usage based car insurance that is gaining a lot of popularity around the world. The technology enables insurers to offer a lot more value and build trust with customers.

In traditional auto insurance schemes, the risk posed by a policy seeker is assessed on the basis of various parameters — age, education level, creditworthiness, driving history, area of residence, etc. These parameters have been reliably used for underwriting over the past several decades. However, in reality, these parameters are only proxies and not finite values collected based on the individual’s actions.

Thanks to the advent of data analytics, it is now possible to monitor the driving behaviour of individuals at a granular level. For instance, using telematics and data analytics, it is possible to monitor the exact location of a vehicle, the engine parameters, and driver behaviour such as speeding, abrupt cornering, etc. The data collected this way provides an exceptionally accurate assessment of the driver and their performance. This is the basis on which telematics insurance policies are outlined.

Hence, if a driver has a great driving record, he/she stands to gain through reduced premiums at the time of car insurance policy renewal.

Stats That Provide a Sneak-Peek into the Future

As per a recent study conducted by Research and Markets, it was found that there were 12.8 million active telematics insurance policies in Europe at the end of 2019. The number of active policies is expected to grow at a CAGR of 28.3 percent to hit 44.5 million by 2024.

In the North American region, it is expected that 53.6 million telematics insurance policies will be in force by 2024. The report also indicated that the US, UK, Italy and Canada are the largest growing markets for telematics auto insurance.

How Does Telematics Insurance Work?

When an individual approaches an insurer for telematics-based car insurance, the insurer provides them a telematics app/device that can monitor their driving and various vehicle parameters. Telematics data can be collected via any one of the following methods:

Telematics Control Unit (TCU) — The TCU is an integral part of the hardware of most modern vehicles. A crash-resistant black box is integrated in the vehicle by the automotive OEM with a complex telematics control unit inside it. The telematics device collects data such as vehicle speed, engine temperature, diagnostics information, etc. from the vehicle. This information is transmitted to the telematics cloud server via a secure communication channel. The data stored in the cloud is accessible via mobile apps, web apps or any other UI. Telematics auto insurance is hence, referred to as black box insurance in some countries.

Telematics mobile app — As part of telematics insurance, it is common for an insurer to provide a smartphone app that acts as a sensor. This app collects various types of data such as GPS position of the vehicle, time of the journey, gravitational forces, instances of driver distraction, etc. at frequent intervals and transmits it to the cloud.

Plug-and-drive device — Some insurers provide plug-and-drive devices instead of mobile apps. Such a device can be plugged into the vehicle by the car owner so that it is out of sight, preventing accidental access. This device records various parameters including safe cornering, timely braking, length of each journey and more. Just like a telematics control unit, this device transmits the data to the IoT cloud from where it is used by the insurer.

The data collected by the telematics device or mobile app can be used to provide suggestions to the driver to improve his/her driving skills. Driver monitoring apps developed by key technology solution providers in this domain monitor the driver’s behaviour in each journey and provide them a score. The driver can analyse the score and improve their driving progressively.

Insurance companies can analyse this collective data at the time of underwriting, to get a clear picture of the risk an applicant poses. This will form the basis of the renewal premium for the vehicle insurance.

How is the Information Collected by the Black Box Used?

The data collected by the black box usually includes the following:

· Distance travelled by a car

· Type of terrain/roads on which the driver travels

· Time period for which the vehicle is used

· Location of the vehicle in real-time

· Speed at which the vehicle moves

· Braking and cornering details

· Alerts at the time of an accident

The data collected by the black box is used to give feedback to the driver and help them get a lower quote for premium at the time of insurance renewal. It should not be considered as an intrusion or privacy threat. Insurance companies usually do not share the data with anyone apart from the cloud service provider.

Drivers who travel fewer miles and those who do not use their vehicles during rush hours stand to gain the most from usage based insurance programmes. However, it should be noted that this type of insurance is completely optional. In case the individual finds that this insurance scheme is not suitable for his/her driving habits, they can always continue on their existing insurance plan.

Benefits of Telematics Insurance Across the Value Chain

Advantages for insurers — A noteworthy challenge faced by insurers today is customer retention. And various studies highlight that price is the real reason that consumers switch insurers. Usage based insurance enables safe drivers to enjoy reduced premiums at the time of policy renewal. Hence, from the insurer’s perspective, it facilitates customer retention.

Consumer’s gain — Telematics insurance increases engagement between the insurer and the policyholder. It enables the driver to get regular feedback on his/her driving behaviour and subsequently improve their driving habits. This results in lower car insurance renewal premium, as discussed previously.

Alerts during emergencies — In case a vehicle is involved in an accident, the black box sends out signals to notify the insurer of the event. These alerts can also be used to dispatch emergency assistance. With telematics insurance, the claim process is eased considerably, and fraudulent claims can be weeded out. If a driver is stranded at a remote location, telematics insurance helps in determining the exact location of the vehicle so that Roadside Assistance can be provided easily.

Overall improvement in road safety — The collective impact of car owners opting for usage based insurance is a phenomenal improvement in road safety. Drivers who have opted for telematics insurance will be more mindful of their driving habits — a change that is absolutely vital, given the disappointing figures depicting increase in road accidents every year.

Challenges in the Implementation of Usage Based Car Insurance

· One of the challenges faced by insurers in the implementation of telematics insurance is the fear of privacy among consumers. Since the driving behaviour and location of vehicles are tracked in real-time, consumers have raised several privacy concerns in the past. Some states in the US have enacted legislative measures so that insurance companies disclose tracking practices. This calls for additional effort from the insurers in managing regulatory requirements in the countries/states they operate in.

· Another challenge is the burden of cost and resource availability associated with the implementation of telematics auto insurance. The underlying technology is, without doubt, an expensive proposition.

· Insurers are also facing challenges in the interpretation of telematics data.

· When low risk drivers are offered lower premiums, there is increased pressure on the overall profitability of the insurance company. This is the reason most insurers find it difficult to integrate this reform into the existing products portfolio.

The Way Forward

Without doubt, the adoption of telematics insurance has been slow-paced in the past. However, the success that insurers have found in the UK, Italy, Canada and US has provided momentum to this technology in other countries.

Telematics technology has the power to alter several aspects of the auto insurance value chain — right from promotional activities to claims reconciliation. The data collected by insurers can also give them insights to connect with consumers and offer various value-added services and offers. Hence, this technology has the potential to mitigate the customer retention issue that is a striking business pain point in the car insurance industry.

There is no doubt that telematics insurance will continue to grow in the future and present a cost-effective mode of auto protection for consumers and insurers alike.