Insurance Telematics: More than Just New Underwriting Criteria

Executives, engineers and business development managers from the insurance and telematics industries have begun to examine the enormous potential for telematics devices to inject the next generation of data services into their dynamic business models. However, few recognize the full range of benefits that telematics capabilities afford.

These novel devices and the architecture that supports them are poised to provide a comprehensive set of new connected services to drivers and their insurers, including enhanced safety and security; greater convenience; immediate access to diagnostic and emissions information; and much more. Because the technology and its potential uses are still new to the insurance industry, there’s a learning curve in place as insurers begin to assess the benefits of on-board telematics devices.

There are some intuitive benefits that emerge almost immediately, however, and they’re easy to understand. For instance: Because telematics devices can be used to track vehicle mileage, insurers will be able to use them to identify motorists who drive fewer miles and, thus, represent a lower underwriting risk than those spending more time on the road.

Similarly, the devices can also provide data on drivers who exhibit aggressive or careless behavior on the road – as evidenced by sudden starts and stops, high speeds and reckless cornering. These are clear indications to insurers of increased risk. Information on when and where someone drives most – perhaps late in the evening or during periods of high traffic congestion – can indicate instances of increased driving risk. Capturing driving characteristics such as these and applying them to various underwriting models makes good business sense. In the short term, this data and the new insurance models they support will benefit insurers as well as safe, low-mileage drivers.

The benefits to insurers of on-board telematics systems – either OEM or consumer-installed – go far beyond the generation of data that enable comprehensive underwriting criteria. In fact, even without extensive empirical data, insurers should expect to lower costs and increase customer satisfaction through intelligent implementation of telematics.

It’s been said anecdotally that “receiving first notice of loss within 30 minutes of an accident can reduce claims resolution costs by an average of $800.” Whether this is actually true, there is hard evidence to support the general proposition that delay in receiving notice of loss leads to higher costs for insurers.

Analysis conducted on 60,000 claims over the course of two years by Diamond Management & Technology Consultants found the average payout to be 20 percent higher for claims reported a day after the event as compared to the average payouts of claims reported within a day of the event. Further analysis shows that any accident reported more than a day after an accident has a 33 percent higher payout.

On-board telematics can make a significant dent in costs to insurers in cases such as these by speeding up the claims cycle time. If there’s an accident, telematics-equipped cars or trucks can initiate a first notice of loss almost instantly. Shorten the amount of time between an accident and a report date and insurers save money. Savings emerge out of shortened claim cycles and reduced investigation expenses.

It’s speed that’s the key, as well as the type of data that’s reported and how it aligns with claims made by the insured. It adds up quickly: The enhanced reporting of data made possible by on-board telematics stands to save insurers billions. According to Diamond’s research, a mass adoption of insurance telematics systems could result in up to a $20 billion savings in incurred losses for the industry by reducing the impact of theft and fraudulent claims, shortening claims cycle times, lowering the number of disputes and providing detailed accident reports.

Traditionally, one of the primary barriers to widespread adoption of telematics system has been the cost of deployment. However, this challenge is far from insurmountable, and recent developments in telematics systems are lessening its impact. Driver-installed aftermarket telematics units are easy to install: Users simply plug them into a vehicle’s On-board Diagnostics (OBD-II) port and then complete activation over the Internet. This approach removes or reduces costs associated with training agents or other personnel to install the systems.

Additionally, some providers of telematics services have designed their units and the underlying technological infrastructure to be flexible and upgradable. This means that existing units can be updated – by downloading new firmware or other programs – with expanded capabilities, even for units in service before the new capabilities become available. This effectively extends the lives of such telematics systems. Moreover, the ability to remotely update large numbers of telematics units, simultaneously and without physical intervention, will help significantly lower deployment and replacement costs while providing an efficient means of quality control.

As vehicle telematics systems become more pervasive in both factory-installed and consumer-installed settings, forward-thinking insurance companies taking the time to understand and implement telematics programs will attain market-leading positions in both profitability and consumer satisfaction. Those ignoring the impending ubiquity of this technology will be forced to play an expensive game of catch-up. As detailed investigations into the benefits (and limitations) of telematics continue to be undertaken, insurance companies will be better equipped to segment their markets and develop unique offerings for new and existing customers.

About the author: Fred Blumer is Vice President of Aftermarket and Data Services for Hughes Telematics, Inc. (HTI). The company offers a portfolio of location-based services for consumers, manufacturers, fleets and dealers through two-way wireless connectivity. Additional information about HTI can be found at www.hughestelematics.com.