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01:32 PM
Chris Perini, Verisk
Chris Perini, Verisk

Why Insurers Should Hasten Telematics Adoption

The rapidly changing dynamics around usage-based insurance warrant further discussion here about why adoption of telematics has shifted from a competitive advantage to an imperative for risk management.

The use of telematics is poised for significant growth over the next decade across multiple insurance verticals. As noted in my previous I&T post, telematics devices are projected to be installed on 16 million new vehicles in the U.S. and forthcoming regulatory changes present large potential for the technology, especially in the EU, China, Russia, and Brazil, with 104 million devices expected to be installed globally by 2025. By 2017, the number of monitored drivers worldwide will rise to 89 million, up from 1.85 million in 2010. Despite insurer hesitance to adopt new technologies and consumer reservations about the "Big Brother" nature of capturing their data in real time, these compelling statistics suggest that telematics is reaching a tipping point in the industry.

The rapidly changing dynamics around usage-based insurance warrant further discussion here about why adoption of telematics has shifted from a competitive advantage to an imperative for risk management. With that in mind, let's dispel a couple of insurer and consumer reservations about the technology.

Chris Perini, Verisk Analytics
Chris Perini, Verisk Analytics

Consider the Total Implementation Cost Picture

When technology advances, costs often decrease, and telematics is expected to follow suit as adoption becomes more widespread. Considering the total cost of ownership, telematics offers revenue generation and cost savings opportunities. Small investments in telematics -- as little as one percent of an overall book, for example -- may be just as effective as a larger one in identifying, discounting, and retaining insurers' best risks.

Over the long term, the strategy can do even more than acquiring a large volume of new risks with unknown profitability. Telematics infrastructure investments may also enable insurers to expand their offerings to other value-added services at marginal additional costs, decreasing the overall ownership investment over time. At roughly $100 per year for each telematics device they purchase or lease, insurers can provide portals to monitor teen or elderly drivers, roadside assistance, and stolen vehicle recovery in addition to the usage-based discounts afforded by the technology. Such diverse incentives can attract new customers and build loyalty among existing ones.

Alleviate Consumer Privacy Concerns

More carriers than ever are offering usage-based telematics insurance programs. The most important aspects of these programs for consumers to understand are that they are all currently voluntary and better drivers qualify for significant discounts.

Simultaneously, GPS location tracking has been raised as a potential threat to consumer privacy, but to reassure customers, some insurance companies are offering programs that do not use GPS. Others store only broad geographic data that measures a certain square mileage but not exact vehicle location. Regardless of the program, all insurers provide full disclosure of what information they are tracking and how they can legally use the data. It's this level of transparency that will foster trust and mitigate apprehension.

In conclusion, the benefits of usage-based insurance, and telematics in particular, are tangible for both insurers and policyholders -- from expanding the amount of data available to help carriers better manage risk to adoption of safer driving habits and decreased premiums for consumers. With growth of telematics set to continue at a substantial rate, insurers that implement programs and quickly scale to diverse offerings will be in the best position to assess risk, attract loyal customers, and remain competitive.

About the author: Chris Perini, CPCU, is vice president and chief marketing officer of Verisk Analytics.

[To hear about how insurance companies and financial firms are managing their complex data architectures, attend the Future of the Financial Services Data Center panel at Interop 2014 in Las Vegas, March 31-April 4.

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