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Usage-based (telematics) car insurance is around the corner

Telematics-based motor insurance will break in to the mass market within five years predicts EMB

January 26, 2009

Usage-based motor insurance (UBI) rating – also know as telematics - is inevitable and will become a standard product offer of many insurers in the next five years according to international actuarial and insurance business consultancy, EMB.

The use of telematics provides too many pricing and marketing advantages to insurers and consumers to be consigned to the fringes of the market for much longer, the company claims.

“The missing piece of the jigsaw is an innovative marketing approach that will connect with the millions of drivers that will benefit from telematics.” says EMB Director, Julian Beardsworth.

According to EMB, telematics-based insurance schemes reward more careful drivers, and those driving at less busy times, who effectively subsidise a portion of the cost of claims incurred by higher risk car owners under most current insurance arrangements. It will mean that differentiated motor insurance polices will be available to virtually anyone on a self-selecting basis, rather than specific demographic groups such as people above a certain age.

EMB estimates that around 50 per cent of UK drivers would be better off with telematics policies. For its part, the insurance industry could use knowledge such as the fact that UK Government Road Casualties Great Britain 2007 showed an 80% lower accident risk per mile on motorways.

There are already numerous examples of telematics-based initiatives across the world – in Canada, Japan, Israel and South Africa. In Europe, Italy is the furthest ahead with an estimated 50,000 insured vehicles, while in the UK the suspension of the Norwich Union Pay as you Drive™ programme – despite its on-line fan club - has not deterred four insurers from signing up to the Coverbox panel.

But only in the US is telematics showing signs of making it to the mass market where Progressive has recently announced a countrywide rollout program for MyRate, subject to regulatory approval, after successful pilots of various technologies in eight states.

Concerns about the ‘big brother’ effect of installing GPS tracking systems in cars to feed back to data centres, which has been seen as the most obvious way of implementing a telematics-based insurance product, have been overstated. There is little evidence that consumers feel strongly about this point since the trials to date have indicated a high degree of trust in insurance companies to handle the accumulated data competently. Furthermore, no-one will be forced to buy telematics-based cover.

In any case, a scaled down technology approach is likely to be more cost effective for the insurance industry. This would ignore location-based data and focus on driving behaviours such as acceleration, braking and lateral forces using a vehicle’s on-board diagnostic port (OBD), which all help build up a richer picture of individual driver risk.

The falling cost of technology such as geographic positioning systems (GPS) and data transfer is probably the single-most important factor in making the economics work for insurers. For example, transferring 1MB of data, which may have cost £1 less than five years ago, has fallen in price to around two pence thanks to the wide availability and uptake of broadband and related technologies.

Governments in many parts of the world view telematics kindly because it supports a number of key areas of public policy such as reducing road use, lowering pollution, minimising road casualties, and improving emergency response in the event of an accident.

“The company that connects with the wider public and clears the remaining hurdles first will undoubtedly steal a competitive march,” notes Beardsworth. During the Norwich Union pilot, it stated that claims reduced by 30% and retention rates were over 90%. “This is the sort of performance that the mainstream motor insurance market can only dream about,” he adds.

Executive quote

“The missing piece of the jigsaw is an innovative marketing approach that will connect with the millions of drivers that will benefit from telematics.” says EMB Director, Julian Beardsworth.

“The company that connects with the wider public and clears the remaining hurdles first will undoubtedly steal a competitive march,” notes Beardsworth. During the Norwich Union pilot, it stated that claims reduced by 30% and retention rates were over 90%. “This is the sort of performance that the mainstream motor insurance market can only dream about,” he adds.

About the company

Established in 1993, EMB (www.emb.com) is a rapidly growing international consultancy firm specialising in non-life insurance. Covering personal lines, commercial insurance and the London Market, its services include Business Consultancy, Actuarial Consultancy, Professional Development, Marketing Sciences and Software. EMB pioneered the development and use of high performance actuarial software using modern desktop PCs. The range is unrivalled, making it feasible to perform tasks that would otherwise be impossible, impractical or hugely time-consuming. Headquartered in the UK, EMB employs more than 300 people around the globe covering Americas, Asia-Pacific and Europe, Middle East & Africa with clients that include 28 of the top 30 non-life companies in the world.

Contact details

For more information, please contact Lorna Hughes or Graham Whitehead at EMB:
Tel: +44 (0) 1372 751060
Email: lornah@lewispr.com / graham.whitehead@emb.com
Web: www.emb.com

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