Telematics: Reinventing Auto Insurance Part II

By Mike Hales, Joe Reifel, Gang Xu and Andrew Beebe, A.T. Kearney

In our first entry on telematics, we noted how it is poised to turn the auto insurance industry's business model on its head. But as the industry faces challenges in implementing telematics - particularly in terms of customer privacy - firms must determine the most compelling propositions before going to market.

Five Steps to Success Many insurers have made forays into the usage-based insurance space. In the United States, Progressive's Snapshot (previously known as MyRate) is the oldest and best-established offering. The recently enhanced and rebranded offering is now available in 22 states, with company expectation to expand Snapshot nationally and roll out broad advertising in 2011. How will consumer perceptions of telematics and usage-based insurance change when Progressive's popular ad character Flo is selling it?

Other insurers including State Farm, Allstate, AAA, American Family and The Hartford are exploring this space with small scale customer pilots. For those still on the outside looking in, the future is tempting and the possibilities are boundless, but how can you make telematics profitable? The market is rapidly evolving, the technology is young, and customers still need to be won over. Insurance companies must be nimble enough to adapt and react to this environment as they move forward. Executives need to know which markets they want to conquer, whether they will be leaders or fast followers, and what core capabilities they want to develop.

We see five steps for success. First, develop a strong marketing message. Leaders will explicitly consider privacy concerns related to telematics and how private information could be used in the case of an accident, and they will convey to customers the value of telematics while managing these privacy concerns. They will also tailor a message for the right market segments and develop the products that match each one's needs.

Next, offer a solid product. The right offering centers on what the customer values: namely, savings, safety and convenience. Customers will part with a certain amount of privacy if they believe they are receiving enough in return. "Valuable" offerings are simple to understand, integrate and reinforce different services, and improve the driving experience.

Of course, target good drivers. Having the safest drivers as customers reduces potential risks up front and is the clearest advantage of being a first mover, as it helps attract and retain the best drivers while, over time, channeling the riskier ones over to competitors. However, this doesn't necessarily mean signing up only the best drivers. Savvy insurers could consider using telematics as a way to improve the performance of lower-quality drivers. In-vehicle and online feedback provided by the telematics technology could ultimately lead to reduced premiums as driving improves. Consumer trials have shown that merely having the device in the vehicle, even without a rate adjustment, will noticeably improve driving behavior. 21st Century and American Family have incorporated telematics with online feedback and offline video to help teen drivers improve their driving behavior. In Europe, Mapfre, a Spanish insurance leader, has introduced "YCar," a new insurance model for drivers the higher-risk 18-to-30-year-old group that rewards responsible driving behavior and contributes to greater safety on the roads. YCar offers policy discounts at the time of contract signing, and then after one year additional deductions vary according to mileage and driving behavior.

Then, make sure you can manage costs. Technology costs are falling: the price of a telematics device and monthly charges for data transmission and management is down more than 50 percent in the past year. Costs can be contained further through supplier partnerships, optimized products and information management, among other moves. Claim costs will go down by targeting the safest drivers first, and then bringing measurable improvement to driving behavior through feedback.

Finally, control the customer experience. The increased frequency and type of customer interactions will require insurance companies to manage a new level of interaction and shift to a more "networked" business model. For the first time, insurers will be involved in the distribution of physical goods-packaging and shipping devices, for example-and they will have to look outside the industry for expertise. When there are so many intermediaries involved-device makers, installers and automakers, to name a few-the issue and operations become more complicated.

Developing unique products and finding new ways to offer value to customers are critical issues for insurance companies. At the same time, a bad experience with a new technology will upset customers and could drive them away. Controls must be in place to ensure that telematics offerings don't damage the brand.

Managing the Risk The additional value of telematics - from active claims management and benefits such as real-time route planning, video-on-demand and location-based services - comes with some risk, however. For example, some automakers in Europe are bundling insurance into the purchase price of vehicles. If technology leads to insurance being bundled with broader services, insurance companies could be squeezed out of the picture. And, of course, claims management tied with telematics could heighten the concerns of customers, who may worry about how their private information is being used.

If offered successfully, however, customer research has indicated the increased pace and frequency of customer interaction, coupled with the unique pricing advantage, could lead to better brand loyalty. When including telematics in your insurance offerings, some best practices to follow include: Developing and protecting intellectual property. There are a lot of players who would like to have a piece of the pie in this fluid market, and the boundaries of intellectual property are poorly defined. Auto insurers must address the question of which technologies they should develop, own and license to guarantee a competitive advantage. Strategic investment opportunities should also be considered, such as taking an equity stake in companies that are developing important technologies.

Forming the right partnerships. A compelling, high-value offering requires coordination among many different parties, not just insurers but also hardware vendors, software developers, telematics service providers, wireless carriers, content providers and potentially automotive manufacturers. By moving fast and thinking creatively, companies can lock in strong partners and develop strong strategic relationships that enhance the value in the eyes of consumers.

Forging the path to profit. While technology costs will fall, and dropping claim costs and better customer retention and acquisition will generate benefits, insurers are still on the hook for a big chunk of up-front costs, including devices, infrastructure and communications. A well-defined strategy for entering the market is critical. We believe the best long-term plans lead to telematics becoming a mass-market offering. Some insurers have taken more measured approaches, by first building out promising segments (such as teens and fleets) to test the market and gather information, as well as gain early momentum and brand loyalty. However, the goal should be to be out front as telematics gains broad acceptance.

Changing the Landscape Ultimately, insurance is a service and, if done properly and fairly, it's all about the value delivered. Therefore the success of telematics will depend on how much value it can create for both insurers and drivers. Insurers may begin collecting more information, but it will help people drive better, think more about risk, advance their understanding of how insurance works and even save money. What could be fairer than precision pricing based on how you actually drive? Telematics would bring unprecedented transparency to auto insurance rates, benefiting honest insurers and good customers. If you're driving well and you trust that your privacy is not at risk, then you're going to want this.

About the Authors: Mike Hales is a partner in the Chicago office and can be reached at [email protected]; Joe Reifel is a partner in the Chicago office and can be reached at [email protected]; Gang Xu is a principal in the Southfield office and can be reached at [email protected]; Andrew Beebe is a manager in the Chicago office and can be reached at [email protected].