Is the Industry prepared for auto insurance telematics transformation?
Written by Scott Shepard, CPCU, PMP Practice Director for Property & Casualty Solutions at @VUESoftware
Telematics is a new entrant in the insurance industry. The change will be profound and could be as extensive as initial uses of insurance computerization or the internet.
The enabler for auto insurance telematics is new technology that can be included or installed in an automobile. This new technology includes computer devices that can control many performance and safety aspects of the automobile. Satellite radio, connections to emergency reporting services and even self-driving cars are predicted. The self-driving cars will anticipate other vehicles, obstacles and road conditions thus providing a safer means of transportation and lower risk of losses. The downside of this new technology will be high replacement cost of technical telematics components in the event of a loss.
The definition of Telematics is evolving but is considered an interdisciplinary field encompassing telecommunications, vehicular technologies, road transportation, road safety, electrical engineering (sensors, instrumentation, wireless communications, etc.), computer science (multimedia, Internet, etc.). It includes but is not limited to Global Positioning System technology integrated with computers and mobile communications technology in automotive navigation systems.
As applied to auto insurance, telematics technology will electronically transmit real time data to the insurer from the automobile for Usage Based Insurance (UBI) programs which will monitor driving behavior moment by moment. This will allow the insurer to rate risk, facilitate underwriting, and offer insurance rates based on an individual’s actual driving behavior.
Traditional auto insurance provides indemnification for vehicle losses, liability for accidents and injury to others as well as medical payments to those injured in the accident. Rates charged by insurers need to commensurate with the risk or size and probability of loss. This is performed today by insurers utilizing loss history over time. Driver and vehicle information is collected on an insurance application that relates to classifications based on historical data. Today’s process is slow and tedious and current rating and classification information is not always up to date.
“Telematics is expected to grow to 107M users by 2018”
— ABI Research
The use of telematics and UBI by insurers will change this paradigm. Since auto risk information will be available through second by second observations across a range of data points, rates can be dynamic and changing based on data that is constantly transmitted from the vehicle. Examples of higher risk and higher or lower dynamic rates could be triggered by vehicle speed, compared to vehicle location, speed limit and rapid start/stops. Vehicle performance, and vehicle location will affect real time rates.
This concept is new for the insurance industry because it includes time sensitive data supported by volume data. Volumes of data require big data environments which adds substantial complexity; but this new technology is a huge opportunity for those insurers that are able to shift to the telematics model.
The other component to an insurer’s use of telematics UBI is the need for enabled core rating and policy systems ability to accept substantial volumes of unique telematics generated data; then utilize the proper rules and algorithms to leverage the transmitted data into dynamic rate changes.
The concept is new but the trend towards Global growth in telematics subscriptions is there. It is expected to grow to 107M users by 2018 according to an ABI Research report on “Usage Based Insurance and Safety Telematics Synergies.” Other studies and articles are predicting the same.
The message for insurers is to anticipate and prepare for the paradigm change to telematics and usage based insurance programs. This change will not only affect core technology applications but also insurer staffing skill sets and basic business processes. Basic standard business processes entrenched within the insurance industry will experience process change like never before. The time to get started is now.
About the author:
Scott Shepard is known for his expertise in property and casualty (P&C) insurance as well as his project management skills. Mr. Shepard has over 25 years of P&C insurance information technology (IT) experience in personal, commercial and specialty lines of business.
Mr. Shepard worked for Exigen Insurance Solutions, Nationwide, Liberty Mutual, and over 10 years at Ernst & Young. He has managed and facilitated P&C software implementations — including policy, claims and billing — for major insurance carriers.