Fast Telematics Follower? Too Late!

The secret of getting ahead is getting started – Mark Twain

We were speaking with an insurance industry executive recently when the subject of auto telematics and usage-based insurance (UBI) came up. After speaking about some of the trends and developments in the market, the executive indicated that their company did not wish to be a leader in adopting telematics capabilities but rather, they wanted to be a fast follower. When asked what they’ve done to be ready to do that, they indicated they had a task force studying the issue. At that moment, it hit us - it is too late to be a fast follower.

Make no mistake about it, telematics will permit historically unprecedented capabilities that stand to change the course of the personal auto insurance business.

The market for usage-based-insurance

The market for usage-based auto insurance has moved dramatically in the past year. At the end of last year, every state in the union had at least four UBI programs filed. And, in 45 states, there were at least eight programs registered. Most insurers with leading market shares now have programs in the market with plans to continue their expansion to more states. Leading carriers are also capturing driving data in new ways.

While the OnBoard Diagnostic Device (OBD) has been the traditional data capture method for most programs, the use of mobile phone apps and/or harvesting data directly from the car’s control systems have emerged as more reliable and cost-effective options. In addition, mobile-phone apps provide opportunities to interact with drivers that did not exist before – essentially apps allow for a rapid move to decommoditize the auto insurance product in ways never before possible – ways that exploit the power of social media, gamification, partnerships with complementary services and products, geospatial analysis and offerings and other inherent technical capabilities of smart phones.

While there are pros and cons for each solution, all provide core telematics data along with new categories of data unique to the particular telematics device. All telematics mechanisms yield new insights about the driver and their behavior and provide opportunities for novel customer engagement. However, we, for a variety of reasons, strongly recommend and favor telematics via a smartphone app.

The knowledge that leading carriers now have about driving behavior with telematics enabled - how they drive, when and where they drive, and how much they drive - is delivering new and important insights into the connection between driving behavior and losses.

Consider something as simple as miles driven. While there have been some automated solutions introduced over the years to get more accurate information on annual miles driven, that pricing parameter is, and always has been, largely self-reported by the policyholder. Having a capability that would give insurers more reliable information on this important component of driving behavior would allow for more accurate and fair pricing. And miles driven is one of the simplest parameters that telematics can provide direct insight into. Other more complex observations like acceleration/deceleration patterns, cornering speeds, and driving behavior in varying traffic densities in specific geospatial locations and weather conditions are some of what is newly available through the mashup of telematics information with available external/synthetic data.

This new ability to creatively combine driving behavior information with other data – combined with advanced analytics - can take risk segmentation and pricing sophistication to a whole new level. Leading insurers are beginning to put this knowledge into their pricing models and targeting the most desirable segments of the market with new and more attractive feature-rich offerings.

Implications for insurers that wait

What are the implications of the rapid progress with telematics in the marketplace for those insurers who are still developing their approach to UBI? The longer they wait, the higher the likelihood that their inforce business will come under pressure from carriers that have the knowledge to better segment and price their business and who poach the best and most desirable business. This dynamic could have a significant impact on an insurer’s book of business. Some studies predict that by 2020, 20% of auto policies in North America will have a UBI component. In addition, many insurance industry analysts believe that those customer segments most interested in a UBI offering are the safest drivers. The implication for losing a sizable piece of an insurer’s best performing risks can’t be ignored.

What can insurers do to catch up?

First, they need to get in the game as opposed to getting ready to get ready. No solution is perfect, but, regardless of the approach and their method of data capture, understanding the data that is captured and how it can be used for strengthening their business is critical. Telematics creates a new category of data and takes time to understand. For auto insurance companies that are considering a Big Data strategy for their business, telematics data is foundational to that strategy.

Secondly, as we mentioned, the customer experience can significantly change with UBI. Considering techniques to differentiate a company’s product from other seemingly similar products and interact with policyholders in new ways is a huge opportunity for UBI adopters. This creates opportunities both in the new business process and in the retention of existing policyholders. Tailoring that experience to reflect the value of an insurer’s brand will be important and can be fined tuned based on experience.

Don't be too late

We believe the time to act is now. And we believe that insurers must not confuse making an effort with obtaining results from their effort. As consumer demand builds for UBI offerings, insurers need a strategic response to requests from policyholders and agents to deliver a more competitive and differentiated offering. Developing and implementing the platform to make this all possible takes time, as does accumulating sufficient data to gain the insights necessary to impact the business. Waiting too long will make it too difficult, and maybe impossible, to ever catch up.

We'd be interested in hearing from you with your thoughts on auto insurance telematics or other topics either via comments to this article or directly via email or phone.

About the Authors

John Lucker is a principal with Deloitte Consulting LLP and is Deloitte’s Global Advanced Analytics & Modeling Market Leader. He is a co-founder of D-rive, Deloitte Consulting’s Telematics Capabilities Services Business.

Bill Mullaney is a director in Deloitte Consulting’s Strategy and Operations Insurance Practice and has over 30 years of insurance industry experience. He is a co-founder of D-rive, Deloitte Consulting’s Telematics Capabilities Services Business.

Sandeep Puri is a director in Deloitte Consulting’s Strategy and Operations Insurance Practice. His work in the insurance sector has included working for multi-national and US insurance companies on strategic and operational matters. He is a co-founder of D-rive, Deloitte Consulting's Telematics Capabilities Services Business.