Overcoming Speed Bumps on the Road to Telematics
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Overcoming speed bumps on the road to telematics Challenges and opportunities facing auto insurers with and without usage-based programs A research report by the Deloitte Center for Financial Services About the authors Sam Friedman is the insurance research leader at Deloitte’s Center for Financial Services in New York. He joined Deloitte in 2010 after a three-decade career as a business journalist, most promi- nently as group editor-in-chief of property-casualty insurance publications, websites, and events for National Underwriter, where he published an award-winning blog and magazine column. At Deloitte, his research has explored consumer behavior and preferences in auto, home, life, and small business insurance. Additional studies have examined how financial services providers might more effectively help individuals finance their retirements, as well as the potential for greater privatization of federal flood insurance. Michelle Canaan is a manager with the Deloitte Center for Financial Services in New York. With a background in the financial services industry, Canaan joined Deloitte’s Capital Markets practice in November 2000. Over the past 10 years, she has served as a subject matter specialist for Deloitte’s Market Intelligence group, with a focus on the insurance sector. She produces insurance-related thoughtware for the organization’s insurance practice as well as for external audiences. Contents Overview: Have we reached a point of no return on telematics? | 2 Creating a niche: How big is the market for UBI products? | 4 Overcoming roadblocks: How might insurers differentiate themselves with telematics? | 10 The numbers game: Telematics depends on gaining actionable insights | 13 Addressing oversight concerns: Regulators on board with telematics, but for how long? | 17 Next steps: Where should insurers go from here? | 19 Added insight: Taking telematics beyond auto insurance | 22 Added insight: Telematics goes global, but speed bumps remain | 24 Endnotes | 25 Acknowledgements | 26 Contacts | 27 Overcoming speed bumps on the road to telematics Overview Have we reached a point of no return with telematics? ERSONAL auto carriers are rapidly in a position to potentially leverage this new Papproaching a moment of truth when it experiential information and underwrite comes to usage-based insurance (UBI) pro- the respective risks posed by the two driv- grams, in which a driver’s behavior is moni- ers differently, as well as price their coverage tored via a telematics device. That goes both more accurately. for insurers that have already launched such Having such first-hand driving data at their products, as well as those that have remained underwriters’ disposal could give existing UBI on the sidelines for a variety of reasons. carriers a considerable leg up over those not Early adopters of UBI are gaining a wealth using telematics, should the non-users remain of first-hand experience and insights that on the sidelines for long. For example, stan- stand to provide a long-lasting competitive dard carriers could lose profitable policyhold- edge against insurers that until now have been ers who are cherry-picked by UBI-capable undecided about whether or when to follow insurers that have acquired the capability to suit, as well as those either unwilling or unable discern driver risk more granularly. Trying to do so. These trailblazers are rapidly collect- to catch up with the frontrunners in the UBI ing a critical mass of data that can be ana- race is also likely to be costly—even more so lyzed to reveal driver behaviors that provide as time goes on and the early birds get a bigger a basis for greater precision in underwriting head start. and pricing. Of course, early adopters still face many For example, current rating methods challenges in executing a viable telemat- would likely rate two drivers identically if they ics program. For one, widespread consumer had the same credit scores, automobiles, and acceptance is no certainty, given privacy demographics and lived in areas with similar concerns for some and skepticism among geographic profiles. However, what if we knew others as to whether having their driving so through telematics observation that one of the closely scrutinized will benefit them in the insured persons drives his/her car one-tenth end, or perhaps even be used against them as much as the other, or at less risky times in a number of ways—and not just by their of the day? In that case, an insurer would be auto insurer. Indeed, a January 2014 survey 2 Challenges and opportunities facing auto insurers with and without usage-based programs by the Deloitte Center for Financial Services Last but not least, we’ll explore how non- exploring consumer use of mobile devices in UBI carriers might compete against those financial services reveals that about half of the offering telematics-based pricing and services. overall driving population is not open to the Wherever a carrier stands on the subject, idea of UBI—at least for the moment.1 we may have already reached the point of no In addition, while regulators have been return when it comes to telematics and UBI. supportive in the early stages of telematics The genie is out of the bottle. The industry as a development, down the road their acceptance whole is not likely to go back to relying only on may depend on a number of factors, including its traditional methods of assessing auto risks. the eventual impact on rates for those who fail A growing number of carriers will likely adopt to meet whatever standards are attributed to behavioral-based telematics as a way to at least “less risky” drivers. There may also be regula- supplement traditional underwriting factors. tory resistance if drivers face higher prices just Indeed, before too long the use of sensory because they choose not to be monitored, for technologies that permit behavioral underwrit- whatever reason. ing by insurers is likely to be expanded beyond In this report, we’ll auto insurance into explore these and homeowners, life a number of other and health cover- important consid- The genie is out ages, and perhaps erations for carriers even non-auto that have jumped in of the bottle. The commercial lines and made a splash as well, such as in the UBI market. industry as a whole workers’ compensa- But we’ll also address tion. Smart homes, the concerns of those is not likely to go biometric monitor- who have not yet ing, wearable tech- taken this path but are back to relying only nologies, and the interested in doing so, Internet of Things offering a heads-up on its traditional are all developing about potential speed trends that could bumps on the road to methods of assessing support and acceler- creating telematics- ate such initiatives. based products. auto risks. But even if UBI For example, we’ll is merely part of the examine how carriers natural evolution interested in following of auto insurance the UBI leaders—but underwriting in an lacking the data, expertise, and/or capabilities increasingly data-driven age, carriers of all to create their own telematics program—might stripes will likely need a strategy to respond leverage the services of third-party data aggre- to those that embrace telematics. Some will gators to level the playing field when going decide to go along for the ride, while the rest up against much bigger competitors with far will have to figure out alternative routes to deeper pools of information at their disposal. survive and prosper. 3 Overcoming speed bumps on the road to telematics Creating a new niche How big is the market for UBI products? Survey reveals three basic transmission, the technology would also enable consumer segments consumers to get more immediate feedback. The survey identified three distinct groups OR a variety of reasons, UBI programs among respondents when asked whether they Fbased on telematics data-gathering will would agree to allow an insurer to track their probably not be for every driver. Indeed, our driving experience through their mobile device general hypothesis that only certain segments if it meant they would be eligible for premium will permit their driving to be monitored by discounts based on their performance (figure insurers was validated by Deloitte’s recent 1). They were: survey, which examined mobile technology experience, perceptions, and expectations • Eager beavers: Over one in four said they among financial services consumers. The would allow such monitoring, without survey, conducted in January 2014, drew 2,193 stipulating any specific minimum discount respondents representing a wide variety of in return. demographic groups, broken down by age and income, split evenly in terms of gender. • Fence sitters: The same percentage of Respondents were asked about their respondents were a bit more cautious, willingness to be monitored by auto insur- noting they might get on board with UBI ers through an app on their smartphone, as if the price was right, given a high enough opposed to having to install an additional piece discount to make it worth their while. of equipment into their vehicle, or having a car in which such equipment was already included • Naysayers: A little less than half said by the manufacturer. they would not be interested in hav- While most drivers who have signed up for ing their driving monitored under telematics programs are currently monitored any circumstances. by a special device that’s part of their vehicle, Among those who were open to the idea of going forward it’s likely that such technology telematics monitoring, about one in five expect could be largely displaced by a mobile app. a discount of 10 percent or less, with the vast Not only would the use of smartphones for majority anticipating 6 to 10 percent (figure 2).