Telematics are like Rhonda on steroids. In the popular advertising campaign for AAMI’s Safe Driver Rewards, Rhonda goes holidaying in Bali thanks to the savings she’s made on her insurance premiums as a result of her good driving record.
But what if insurers based their premiums not just on a great claims history but on data about the way a car is driven, such as safe braking and slow cornering, gathered from information sent to them from the car itself? That’s exactly what telematics offers the insurance sector.
Martin Burgess, Director of Insurance Telematics Australia, explains insurance telematics is about collecting data about the behaviours of the drivers using a motor vehicle, which is transmitted back to the customer’s motor vehicle insurer.
The biggest benefits of telematics accrue to operators of vehicles fleets.
Burgess says the data typically collected includes the distance travelled, speeds, types of roads used and the time of day the vehicle is used, as well as instances of harsh acceleration, braking and cornering. “This information can be used by the insurance company to more accurately determine the correct premium for the risk being insured,” he says.
Adam Game is CEO at Intelematics Australia, which has been in the telematics space in Australia since 1999. Game explains the information is gathered by a ‘black box’, which is connected to the internet in one of two ways. The data can be gathered by hardware and software installed in the vehicle at the time it is manufactured. The alternative is to use the driver’s smart phone to gather the data.
Game says there are certain advantages to carmakers embedding the technology in vehicles at the manufacturing stage. It means existing screens and audio functionality can be leveraged for the purpose of telematics. In contrast, if a vehicle is modified after it is manufactured to enable telematics, devices operate independently of the vehicle and the technology is generally less sophisticated.
How is telematics used?
Telematics gives insurers the ability to offer pay-as-you-drive (PAYD) and pay-how-you-drive (PHYD) policies.
Says Burgess: “The alternative to insurance telematics is what the insurance industry has been doing for the past 20 years. Customers are charged premiums based on their demographics and so are bundled in with other customers with similar demographics.
“The result is a less-than-accurate premium being charged for the risk insured. For this reason insurance telematics is a game changer for the motor insurance industry,” he says.
Between the next three and six years, the majority of new Australian passenger vehicles will be wired for telematics.
According to Burgess, the advantage to insurers is the ability to more accurately price the risk they are insuring. “The advantage for customers that are using telematics is that they can influence their insurance premium and so potentially receive discounts based on their driving behaviours,” he says.
Another application of telematics is for determining the insurance premiums of exotic vehicles, says Game. “Telematics has longstanding use for stolen vehicle tracking and recovery. It is used to help recovery of stolen vehicles and lower premiums for high-performance cars.”
Peter Johansson, Zurich Financial Services Australia Senior Risk Engineer, says some of the biggest benefits of telematics accrue to fleet operators. “It will help fleet managers ensure they have the right number of vehicles, improve productivity across the fleet and smooth back office process,” he says. For instance, telematics can be used to automate pay systems, based on drivers logging on and off work using technology embedded in vehicles.
“It’s also handy for scheduling, fatigue monitoring and road usage. Data can also be used to lobby local government to allocate roads for vehicles,” Johansson says.
He says Zurich has incentivised fleet clients to use telematics, and can use the data to create an overall risk score for clients. “If a good operator has drivers who observe speed limits and have low incident and loss rates, we have every reason to lower premiums. From a fleet insurance perspective, telematics will be used to determine premiums, but we’re not quite there yet. It also gives fleets with a good score the option to take a higher deductible because they have fewer incidents.”
Where’s Australia at?
According to Game, until recently telematics has been used primarily for stolen vehicle recovery rather than for usage-based insurance. But now the major car manufacturers have connected vehicle programs and he believes over the next model cycle – that is, between three and six years – the majority of Australian passenger vehicles will be wired for telematics.
“A number of businesses are also sensing an after-market opportunity. There are also a range of applications in the commercial vehicle market in putting vehicles online, for instance the ability to remotely diagnose vehicle faults, as well as profiling individual drivers against other members of the fleet so businesses can promote more eco-friendly driving,” he says.
Brokers now have the opportunity to engage with commercial fleet managers and underwriters to take advantage of telematics to improve driving behaviours.
Johansson says the major vehicle fleet operators are already using telematics, and the more proactive smaller businesses are as well. “Initially businesses are using it for vehicle tracking and speed alerts. But in the future it will become more about driver performance management.”
The impact on brokers
When it comes to the impact of telematics on insurance brokers, Game says in the commercial vehicle space, “we’re about to see connectivity used to measure insurance parameters. So for brokers, there really is the potential for significant change to risk pricing.”
Johansson says for some brokers’ clients it means better cover and pricing. “If a broker gives us company-wide data for a client for 12 months and we see a low incident rate we sharpen our pencil. But it could make it harder to get cover for poorly performing clients. We may also become concerned when we know an operator has telematics capability, but we’re not getting the data. This really has the potential to change the way brokers present clients to insurance businesses; some brokers are already onto this.”
Burgess agrees insurance telematics opens up many new opportunities. “Brokers now have the opportunity to engage with commercial fleet managers and underwriters to take advantage of telematics to improve driving behaviours, thereby improving the risk profile of the fleet, reducing fleet running costs and improving fleet productivity.
“This can only be good news for brokers who spend a lot of their time trying to convince underwriters the fleet they are trying to place is a good risk.”
Telematics around the world
In October, QBE became the first insurer in Australia to offer telematics, after launching its Insurance Box technology. Sold directly to domestic motor customers, the product uses a plug-in device to monitor driving habits. Insurance Box Founder Frank Peppard says he expects young drivers and their parents to be particularly interested.
“These drivers stand to save significant dollars through this new ‘skills-tested’ approach to car insurance,” he says.
The device can also be used to provide information in the event of an accident, as well as to locate a stolen vehicle.
Domestic motor telematics have already been in use in Europe, the US and many other countries now for a number of years. “Experience has shown this new way of doing business has improved underwriting results, reduced claims costs and improved loss ratios for insurers,” Insurance Telematics Australia Director Martin Burgess says.
He says for customers and the community, insurance telematics has shown to improve driving behaviours, resulting in fewer motor vehicle accidents and injuries on roads.
But policyholders are concerned telematics could result in higher premiums. According to research involving 7500 European consumers by professional services business Towers Watson, 55% of drivers say they are interested in telematics insurance. In the US, where telematics is already becoming a mass market product, the comparable figure is 50%.
But almost two-thirds of respondents say they would be interested in telematics insurance only if there was a guarantee premiums would not increase. The study found worries about the cost of insurance rising, as well as concerns about how personal data would be managed and used, may also prevent consumers from embracing telematics.
The research also found pay-as-you-drive products could penalise drivers who drive more frequently, the same drivers who are most interested in telematics.
The benefits of telematics
Telematics offers other benefits beyond those used to price insurance premiums, including:
- The ability to log into a secure website and track changes in driving behaviour and driving behaviour score over time.
- The ability for the customer to monitor the driving behaviour of other people using the motor vehicle such as children, friends or employees.
- The ability to reduce fuel and running costs by being able to better understand individual driving behaviours.
- Automated monitoring of the vehicle in the event it is stolen.
- The ability to track, locate and recover a stolen vehicle.
- Automated alarm to the customer’s insurance company in the event of an accident, thereby triggering immediate assistance.
- Improved ability to determine liability in accidents from detailed telematics accident data.
- Reduced frequency of insurance fraud
- Improved claims frequency.