Telematics: A complicated fad or a ticket to the game?

The world has become obsessed with the concept of Big Data, but any data is in itself pretty useless unless it can be applied in a way that provides a competitive advantage. While we understand the potential of technology to gather masses of data, one can hear the chorus: so what? And this is at the heart of the debate around telematics.

Telematics is clearly a means of gathering data that previously has not been readily available. The industry has therefore had to rely on proxy data. Without the ability to track and measure driving behaviour, we have relied instead on age, gender, vehicle capacity and past claims experience as proxies for driving behaviour.

However, there is no guarantee that an 80 year old grandmother does not drive her 2 litre Corsa like your average taxi driver through Sandton rush hour.

Improving risk profiles

Data gathered via telematic devices gives insurers the ability to use this data in a way that they can develop more accurate risk profiles on their customers. In so doing, they can improve their risk selection and pricing accuracy. The ability to improve risk selection and pricing accuracy through access to data is clearly a significant competitive advantage. This is clearly seen in the difference between the loss ratios experienced by the traditional insurers and the direct insurers, even without the benefit of telematics {Refer to the April edition of FAnews}.

However, access to telematics data provides far more than just pricing accuracy and better risk selection. Another key factor in building a profitable motor insurance book is retention - there is a positive correlation between the average policy retention rate and the profitability of the book. With the rate of churn having increased dramatically with the growth of the direct insurance market , the ability of telematics to improve retention is a significant advantage.

Going beyond insurance

Being able to offer a client a premium that reflects their individual risk profile should provide a pricing advantage that will in iteslf drive retention. However, the ability to tie driving behaviour into a rewards programme provides a far more compelling retention opportunity. Specifically when it allows an insurer to reward positive risk behaviour from the outset, and not through some post facto premium refund. This appealls to the consumer’s base desire for instant gratification.

The real time data provided by telematic devices provides insurers with the capability to differentiate their service. By knowing your exact location, as well as being able to measure impact, insurers are able to proactively manage an incident by dispatching emergency services and directing the insured through the claims process. This differentiated experience will further drive retention.

Besides improving the claims experience, by being in control of the claims process from the outset, insurers can direct their repair spend and reduce leakage through unnecessary towage and storage charges that currently plague the motor repair process. This in turn will reduce their average repair cost and allow them to be even more competitive when it comes to pricing in the market – a further driver of retention.

The psychology of telematics

Positive selection is another benefit of telematics. Certain people will not be interested in a telematics product because they are heavy on the accelerator and drive into corners too quickly. As far as insurers are concerned, they are equally happy not to have those individuals on their books or if they are on their books, it will be at the right price.

If an insurer’s competitor is willing to take on those high risk clients at the wrong price, it is a win-win scenario, because it means that those insurers are going to have to over charge the more conservative driver to subsidise the ‘would be Jody Scheckter’s’, adding to the positive selection.

But probably the most compelling benefit of telematics lies in the lesser understood concept of gamification. Wikipedia explains gamification as “a technique to leverage people's natural desires for competition, achievement, status, self-expression, altruism, and closure.”

The concept works on the competitive gene in our human psyche. No one likes to get a report at the end of the month telling them that they are in the bottom quartile of their peer group. In this case, the peer group is the insurer’s client base. The result is that these insureds are subconsciously going start to focus on how fast they corner, how sharply they break and how often they exceed the speed limit.

Becommig a trusted insured

Discovery Insure argues in its advertising campaign that it has better drivers. Whilst this claim has never been put to the test, the theory of gamification probably supports their notion. I also suspect that they are probably able to prove that, on the whole, their customers have improved their driving behaviour while being insured with them. Not only does this support their claim, but it also adds credence to the theory of gamification.

When Discovery Insure came to market with its fully integrated telematics product, many sceptics were quick to label it as being too complicated and too costly for the average consumer. One can not help but think back to the days of the Outsurance launch, when sceptics were labelling it as something that will never work as insurance is too complicated for the average consumer to purchase over the phone. Today there are more than 20 direct insurance offerings in the market, which suggests that one should not underestimate the intelligence of the average consumer.

As far as price is concerned, given the benefits of their rich data as well as a cleverly constructed rewards programme, there is no reason why Discovery should not be able to boast the best price for the best risks in the market.

Elementary my dear Watson

Returning to the question posed at the outset: is telematics a complicated fad, or the ticket to the game? I am firmly of the view that telematics will become the ticket to the game and any insurer that is not currently developing the product will likely miss the boat.

My reasoning lies in the fact that the supposed complexity of the product from a consumer perspective is a myth. And with the advance of technology, the costs associated with gathering accurate driving data will come down. As more insurers start to adopt the technology, the benefits of pricing, risk selection, rewards and service will be neuatralised. Driving score will become the standard in the same way that ITC scoring, age, gender and past claims experience are the current standard in motor insurance underwriting. Those insurers that are slow to adopt the technology will experience the spiral of anti-selection as they begin to pick up a disproportionate amount of bad risk due to inadequate pricing.

As was the case with the launch of direct insurance in this market, we are not that different in this country that trends abroad should be ignored. Telematics and other usage based insurance products have become the global standard for motor insurance in most developed countries and with the rate of technological development, it is likely that driving behaviour becomes as standard as the age rating factor in current motor insurance products.