Telematics Could Change the Game for Auto Insurers
Posted by Sam Friedman, Insurance research leader, Deloitte Services LP, on June 11, 2014
Auto insurers are rapidly approaching a moment of truth when it comes to usage-based programs, in which driver performance is monitored in return for a potential premium discount.
Early adopters of usage-based insurance (UBI) are collecting a critical mass of data via telematics that could provide a basis for greater precision in underwriting and pricing. Having this first-hand information at their disposal to supplement more traditional proxy data, such as credit scores, could give existing UBI carriers a considerable leg up, especially if those not employing telematics to track drivers remain on the sidelines for too long.
Meanwhile, the trend toward UBI could soon accelerate, as more carriers cut telematics overhead costs and ease implementation by monitoring a driver through an app downloaded to their smartphone, rather than by having to install a tracking device in the insured's vehicle.
Of course, early adopters still face a number of challenges in executing a viable telematics program. For one, widespread consumer acceptance is no certainty. Indeed, a survey by the Deloitte Center for Financial Services exploring consumer use of mobile devices in insurance, banking, and investment management revealed that about half of the respondents were willing to have their driving monitored if they might earn a premium discount. But the other half is not open to UBI — at least not yet.
Among these "naysayers," some may be leery about sacrificing their personal privacy if an insurer is privy to how and where they drive at all times. Others may be concerned that having their driving so closely scrutinized by an insurer will ultimately result in higher rather than lower premiums, should their performance not be evaluated favorably.
Some of these "naysayers" might eventually be won over as UBI usage expands, and as more value-added services, driven by telematics, are offered. However, a bifurcated market could end up developing over time, with hard-core "naysayers" representing a separate class of drivers treated as a specialty niche.
In addition, while regulators have been supportive in the early stages of telematics implementation, down the road their acceptance may depend on a number of factors, including the eventual impact on rates for those who fail to meet whatever UBI standards are attributed to "less risky" drivers. There also may be regulatory resistance if drivers face higher prices just because they choose not to be monitored, for whatever reason.
Still, our research indicates that a significant consumer segment appears to be ready, willing, and able to at least test drive UBI programs. The question is whether carriers that want to enter this market can gather sufficient data quickly enough to compete against early UBI adopters.
One way to clear this hurdle may be to work in concert with other carriers and third-party organizations. In this collaborative model, a group of insurers could pool telematics data while concealing the personally identifiable information of their own policyholders. Thus, each participating carrier could access a much wider and deeper aggregated data base than any one of them could generate on their own. This option could allow smaller and mid-size insurers to compete on a more level playing field with their bigger rivals, rather than perhaps having to concede the telematics field to the industry's giants by default.
What are the next steps for those contemplating a move into UBI? How might carriers that decide not to enter this market compete against those that do?
To read more about the opportunities and challenges involved with UBI, download our full report from Deloitte University Press, "Overcoming Speed Bumps on the Road to Telematics." In addition, register for Deloitte's June 24 debriefs webcast on "Auto Insurance Telematics: Where the Data Meets the Road."
Sam Friedman is insurance research leader with Deloitte's Center for Financial Services in New York. He may be reached at firstname.lastname@example.org.
As used in this document, "Deloitte" means Deloitte LLP [and its subsidiaries]. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.