The Insurance Black Box is Half Empty

I spoke to an international group of law enforcement and counter terrorism officials earlier this week about automotive cybersecurity.  The organizers of the event specifically asked that there be no mention of the name or location of the event, so pardon the lack of details here.

During my presentation I did what I often do, I asked how many people in the room had ever participated in a usage-based insurance program - ie. a program where the insurance company plugs a "black box" into your car and monitors your driving in the interest of helping you obtain a discount.  Not surprisingly, not a single hand was raised.

I found this reaction remarkable and unremarkable.  Within the telematics industry I find a dogged determination by executives to avoid eating their own dog food.  Even at insurance telematics events there are few attendees that will confess to participating in a usage-based insurance program using an app or black box or some other means of driver monitoring.

But at an event for law enforcement officials I thought surely there would be interest in the technology.  But no, none.  The event was taking place in a country that makes liberal use of surveillance cameras, which would suggest that privacy is not an issue.  And surely law enforcement personnel would be some of the safest drivers of all and, therefore, in the best position to benefit from a monitored insurance offering.

But, no, these law enforcement officers were not interested in having their driving, or anything else, monitored.  More importantly, as one told me, cheaper insurance programs (for his teenage driver) are available WITHOUT the black box, so why sacrifice one's privacy if it isn't necessary to get the discount?*

I mention this in the context of the findings of a study released by the British Insurance Brokers Association that found that "nearly half a million drivers choose 'black box' car insurance."  BIBA's study purports to show a 40% increase in black box telematics car insurance policies over the past year - now numbering 455,000 in the U.K., according to the report.

This is a glass half empty story being dressed up as a glass half full. An industry representative is quoted in The Telegraph saying the industry is delighted at the uptick in usage-based insurance - I am pretty sure the insurance industry does NOT want these programs described as "black box" telematics, by the way.  "Telematics is becoming the motor insurance solution of choice among young drivers as they can take control of their own premiums by electing to have their driving behavior monitored," he gushes.

Let's be clear about one thing.  In the U.K., the insurance industry's push for usage-based insurance for young drivers is clearly based on coercion and price gouging, not choice.  Thankfully, due to the competitiveness of the industry, it is still possible for young people in the U.K. to find inexpensive policies without monitoring.  (I guess there is no honor among thieves.)  It may be getting harder, but it is possible.

If there is any doubt in your mind as to the coercive intentions of insurers that doubt is removed by the BIBA study's further claims that crash risk drops 40% for monitored drivers and that monitoring helps reduce theft claims.  There was a further conclusion associated with the BIBA study that "drivers without an insurance 'black box' could be forced off the road within 10 years," according to The Telegraph report.

The strong language is to be expected from The Telegraph, perhaps, but the intention of getting ALL drivers into telematics insurance programs is clear.  The insurance industry, which sometimes behaves like an organized crime syndicate, sees the emergence of telematics-based insurance as a critical turning point in the industry - to finally perform insurance underwriting with perfect information regarding driving behavior rather than relying on credit, driving history or demographic data - all of which can lead to discriminatory practices or accusations.

But even monitored driving data can be a proxy for discriminatory practices, which is just one of many reasons why insurers are struggling to penetrate beyond the 10% of the population willing to participate in the programs.  Insurers have already discovered that only about 10% of drivers drive well enough to benefit from sharing their driving data.  To penetrate beyond this 10% insurers have to make compromises on the kinds of discounts they can offer.

But getting connected to consumers has so many added benefits that insurers want everyone to believe that usage-based insurance is a mass market phenomenon and that "everyone" is doing it and that there is a "surge" in interest.  At conference after conference that I attend I find an absolute lack of interest in usage-based insurance even among purveyors of these solutions.

The interest of insurers is so intense because not only will their underwriting of risk be more accurate with monitored driving solutions, there is also the possibility to reduce fraud and the opportunity to improve the first notice of loss (FNOL).  Connected insurance programs enable insurers to more rapidly respond in the event of a crash to mitigate the cost of collision aftercare.

Mitigating the cost of collision aftercare is good for the insurer and the insured, but it may not be in the interest of the insured.  The insured person may not be aware of all of their options for replacing or repairing their vehicle, and the insurance company is not a disinterested party - now in the prime position to "manage" the customer's decision making.

Usage-based insurance has found a home - let's call it a niche - in the insurance marketplace.  But as I have written before, until usage-based insurance is the cheapest option available in the market, it will never be a mass market offering.  I cut my own auto insurance premium in HALF when I switched from telematics-based insurance to a non-monitored solution.  I am still looking for a show of hands of industry participants that are participating in their own solution.  Are you eating your own black box insurance dog food?

*I DO know why law enforcement officers eschew telematics-based insurance.  Law enforcement officers know how they use tracking devices against law breakers and organized crime.  Tracking devices represent a security vulnerability and may, in fact, be antithetical to the insurance-customer relationship.

The insurance-customer relationship is based on trust.  ("Did you cause the crash?" "No!" "Okay, I trust you.")  Introducing a tracking device into the insurance-customer relationship is treating the customer as a suspect.  ("We have evidence that you caused the crash." "No!" "Yes.")  Insurers are replacing trust with tracking.  Law enforcement officers don't like it and you probably won't either - unless you have no choice - ergo, you have been coerced by usurious rates.

Roger C. Lanctot is Associate Director in the Global Automotive Practice at Strategy Analytics.  More details about Strategy Analytics can be found here: https://www.strategyanalytics.com/access-services/automotive#.VuGdXfkrKUk