Jon Tindall, Senior Consultant and Telematics specialist for Finity Consulting, navigates us through the maze of telematics information that’s out there — providing everything you need to know about the current state of play, and what lies in store.
What exactly do we mean when we say ‘Telematics’ — in an insurance context at least?
Insurance telematics refers to any insurance product that utilises ‘live’ information from the insured to assist in the design, pricing and management of the product.
More specifically in the motor insurance space we mean when a device — such as a hardwired box or a smartphone app — is used to record characteristics of the drivers behaviour as well as the vehicle that are sent to the insurer.
How long have insurance telematics products been around — how did they evolve?
Since the beginning of the century really. Progressive in the US were the trail-blazers in the market, introducing their first products at the beginning of this century after having patented lots of the first technologies in the late 90’s.
The products originally grew out of the expansion of pay-as-you-drive (PAYD) style policies — based on the vehicles usage. These then developed into pay-how-you-drive (PHYD) policies where the driving behaviour influenced the pricing and management of the policy.
Who is playing in this space at the moment — is it the big guys, the small guys, the new guys?
It’s across the spectrum but each insurer generally has their very own, specific propositions that they are pursuing. Some of the big players are looking to defend their market shares through products targeting improved retention whereas the challengers are more likely to want to disrupt and acquire business. Others may be looking to make a ‘data play’ — realising the richness of the information being collected by these devices and looking to monetise this value down the track.
Different objectives require a different product design.
What has been happening around the globe recently in the telematics space?
The UK have been at the forefront of the motor telematics market since its initial development in the US. The products target niches in the overall market where telematics is particularly useful. This means that while in some segments telematics products dominate, the penetration of telematics overall is still relatively minor. Overall infiltration of telematics products was expected to reach around 3% in 2015.
Europe has seen the most rapid growth in the last few years. Italy specifically has led the way and currently has a telematics penetration of over 5% (more than 2 million vehicles). Spain and Portugal have also seen their markets develop but to a lesser extent than seen in Italy.
The telematics market in the US has also expanded substantially in recent years. There are many big insurance names who now offer a telematics product including Progressive, All State, Liberty Mutual, State Farm and Zurich — amongst others.
What have been some of the drivers of the development of the telematics take-up in these different jurisdictions?
The drivers of growth have varied. In the UK it was originally to address the unaffordability of motor premiums for some segments — particularly young drivers. More recently the EU ‘gender directive’ (meaning premiums can’t be based on the insured’s gender) has provided another driver for growth in the industry.
In Italy the market was driven by escalating bodily injury claims and high theft rates. The European market has also recently benefited from the E-Call legislation requiring all new passenger and small commercial vehicles to have telematics devices installed ‘pre-market’ by October 2015.
In South Africa the security features offered by telematics products have been a major driver of market growth.
Where are the likely new growth areas for insurance telematics products?
There are many other areas that are looking into developing telematics products. Earlier this year the Japanese insurer MS&AD spent over £100m buying InsureTheBox who are leaders in the telematics industry in the UK. They have stated their intentions to introduce PHYD style polices to the Japanese motor insurance market.
Brazil and India are emerging markets that are beginning to build some momentum and could be the next area to see significant growth in the telematics space.
How has the market developed in Australia and New Zealand in recent years?
The growth of the telematics market in Australia and New Zealand has been slower — but at the same time there has been a steady advance.
QBE and AI Insurance had very quiet launches of ‘box’ style products in 2013, but they weren’t supported to a great extent by significant marketing and distribution strategies. It wasn’t until 2014 that TOWER in NZ introduced the first smartphone app based product in the region.
AAMI (a Suncorp brand) had the first significant Australian product launch accompanied by a substantial marketing campaign at the end of 2014. This is a soft launch from a pricing perspective with the benefits to policyholders currently limited to free road-side assistance.
Whilst there wasn't any significant launches during 2015 there is anecdotal evidence that a number of Australasian insurers are planning pilots or launches of telematics products in the coming 12 months.
What are some of the different dynamics affecting the local market when compared with overseas?
One of the biggest impediments to the industry ‘down-under’ is the much smaller premium at stake. That is largely due to the fact that bodily injury cover is not included in a comprehensive policy and 3rd party bodily injury is covered through a state-based regulated scheme. This means that average premiums are significantly lower than in other jurisdictions.
The smaller premium pie means there is less money available to absorb the fixed costs of installing telematics devices — one of the major reasons that most people see smartphone based solutions as the only really viable way forward for the market here.
In addition, Australia has a relatively concentrated motor market with the two biggest players writing more than two thirds of the personal lines motor policies. This has meant that there is a significant inertia in the Australian market and there is not a great incentive for the incumbents to rock the boat — at this stage at least. This inertia has also played out in the aggregator space where they have struggled to gain traction in Australia despite their success overseas.
The customer proposition
How important is the customer proposition when designing a telematics product?
It’s vital. The customer proposition needs to be attractive enough to convince policyholders to allow their privacy to be encroached upon. Customers would not agree to being monitored in such a way if there was no incentive — be it monetary or otherwise.
The customer proposition is what makes them select the product in the first place and continue using it down the track. It is important that the proposition is ‘shaped’ however, so the better drivers have larger incentives, and risks that you would prefer not to write can be dis-incentivised to take out or renew a telematics policy.
What are some of the different ways that insurers have approached the customer proposition around the globe?
There are as many product designs out there as there are insurers offering a telematics product. The strategy of the telematics play will go a long way to determining the appropriate product design. Is it to attract new business, retain more business, write better business or a combination of these?
The first incarnations of these products focussed on premium discounts or bonus ‘miles’, but since then a plethora of alternatives have been developed. Some use freebies and third party relationships to offer incentives — such as movie tickets, discounted petrol, tyres etc.
Others rely more on ‘gamification’ — providing a game-like environment where you can view leader boards, win badges or compete with friends. This attracts users to download the app and, more importantly, to continue using it.
Smartphone vs ‘Box’
Technology is the cornerstone of a telematics product — What are the different technology solutions being adopted and what are the pros and cons of each?
The initial implementations of telematics involved the hard-wiring of boxes into the dashboard and/or engine of the vehicle. These ‘hardwired’ solutions are expensive to manufacture and install but provide the widest range of information that can be made available to the insurer.
From there OBD II devices became popular — such as with the Progressive ‘Snapshot’ product. These devices plug directly into the OBD II port that most cars have accessible in the cabin. These were cheaper than hardwiring but had the disadvantage of being able to be easily removed.
More recently, especially in an Australian and New Zealand context, smartphone based app solutions have become the popular platform to support a telematics product. The low cost of implementation and the ability to future proof the experience are key attractions of app-based solutions.
Conclusion — Where is this all going in the next 5 to 10 years?
Vehicle technology is a fast developing space. How do you think the next few years are going to play out for the insurance telematics market?
There are a wide range of estimates out there around the possible expansion of the insurance telematics market over the next five years. One thing that can be banked on is that as the technology required to support telematics becomes more integrated (i.e. via pre-market installation of telematics capabilities). There will be a wider acceptance of the cost and intrusion of such devices.
That added to a growing acceptance from regulators of the benefits of telematics devices, from a safety and planning perspective, should lead to a substantial reduction in the expenses faced by insurers in implementing and managing a telematics portfolio.
How might manufacturers play a more significant role in the distribution of insurance products?
As pre-market devices become more commonplace, the role of the manufacturer in both the distribution and management of motor insurance will become increasingly important. In effect the manufacturer will be ‘upstream’ of other players in both the distribution of policies, or in control over the information being transmitted from the vehicle.
This article is an extract from SSP eye issue 7
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