The future of motor insurance: Could telematics be the answer?

Local and international insurance industry players are grappling with the issue of sustainability of short-term motor books. Could telematics be the solution?

Motor insurance remains the largest class of business for the short-term insurance industry, yet the sustainability of motor insurance books is under severe pressure for a number of reasons.

As a result of the insurance industry collaboration with partners such as Business Against Crime (BACSA) and the South African Police Services (SAPS), instances of vehicle crime have reduced by 50% since 2002. Nevertheless, there is no room for complacency with as many as 39 vehicles hijacked and 220 vehicles stolen each day.

In addition, new challenges have arisen. The focus is currently on the high cost of claims related to the issue of road safety, which, according to SAIA, is becoming increasingly problematic for many members within the short-term insurance industry. Driven by issues such as the number of unlicenced and uninsured drivers, bad driving behaviour, vehicles that are not roadworthy, congestion on the roads and poor roads, around 70% of insurance claims are road-accident related. This is particularly problematic in light of the surge in the cost of motor repairs.

New rating requirements

“Individualised premiums are the way of the future,” comments Insure Telematics MD, Johan van der Merwe, who has over 20 years experience in the insurance industry, including as marketing director of Budget Insurance in the UK.

There are two reasons for this. Firstly, even entry-level vehicles are being fitted with expensive, imported parts, significantly increasing the cost of repairs. The result is that vehicle value-based rating of motor premiums is no longer effective.

Secondly, a major contributor to the high accident rate is poor driver behaviour. Arrive Alive statistics show that 90% of accidents in South Africa are preceded by a road traffic offence. In 70-80% of all accidents, the major contributing factors were aggressive, reckless, negligent or inconsiderate driver behaviour, including non-adherence to traffic rules, speeding and drunken driving. This makes individual risk rating increasingly important for insurers managing these driver risk factors.

And it is in addressing these individual risk factors that telematics can play a significant role.

What is telematics?

Telematics can be described as the confluence of information technology and telecommunications capabilities. Using, for example, Global Positioning Systems (GPS) and wireless cellular technologies, telematics made vehicle tracking possible as a security measure against theft and hijack. Today, telematics offers far more than vehicle tracking for security purposes. Driving behaviour and actual performance on the road can also be recorded, including where and how often cars are driven, adherence to speed limits, sudden braking, frequency of rapid accelerations, and more.

Insurance telematics is the use of this detailed information by underwriters to obtain a more accurate view of the individual risk, which can be used in determining fair, individual ratings.

Benefits to insurers

Some insurance telematics experts predict that this new technology will revolutionise the motor insurance industry.

A move to individualised insurance premiums instead of group averages is rapidly becoming an imperative to ensure sustainability of motor books. Pay-as-you-drive insurance is already a reality and as more competitors offer such individualised solutions to clients, telematics will become a crucial aspect of staying ahead of market dynamics. In addition, telematics creates opportunities for real product differentiation and provides scope for sophisticated marketing strategies tailored to niche markets. It will also assist the industry in its current efforts to improve road safety statistics and the high accident rates.

Telematics also offers insurers tangible, immediate benefits. Claims ratios are improved as fraud and incidences of theft are reduced. Claims costs and claims disputes can be reduced as claim handlers have a full picture of the exact circumstances under which an accident occurred. An insurance telematics device might even become an incentive for high-risk drivers and commercial fleet owners to improve driver behaviour, where this can result in significant reductions in their premiums.

Challenges faced

One of the main challenges faced by insurers in term of implementing insurance telematics is the cost of implementation.

Of course, the other issue is privacy. Many drivers consider the collection of such detailed information about their movements and driving behaviour as an infringement of their privacy. From another quarter, insurance telematics providers will face stiff regulation with regard to the protection of client information, particularly in light of the new Protection of Personal Information Act (POPI).

Benefits to insurance clients

Of course, for those consumers who are law-abiding drivers, are not concerned about their movements being monitored, and are dealing with reputable companies who takes the responsibility to protect private information seriously, there are numerous benefits.

The first and most obvious is lower insurance premiums based only on the individual’s risk profile, which can be accurately determined. One of the earliest examples was the Pay As You Drive™ product from Hollard, launched in 2006. It allows the insured to pay a rate per kilometre actually travelled and recorded through either a data collection device or the use of a tracking device, which also improves vehicle security.

Safety is another major benefit - service providers, roadside assistance companies, security companies and even family members can accurately pinpoint the location of a vehicle in real-time, and even track the progress of the vehicle online in situation where someone might be driving a long distance, or alone late at night.

There are also a host of other benefits, such as access to real-time on-board communications, navigation, emergency assistance – for example remotely unlocking doors if the keys are locked inside - and even concierge services at the touch of a button. The systems can also, for example, send help if an airbag is deployed, or provide remote diagnostics when a warning light comes during driving.

Global phenomenon

Insurance companies around the globe have begun to experiment with the technology and a number of pay-as-you-drive and pay-how-you-drive products have been launched in the US, UK and Europe based on telematics.

In South Africa, the concept is driven by Insure Telematics, who is working with South Africa’s leading vehicle tracking companies - including Altech Netstar, Digicore, MixTelematics and CarTrack - to offer a unique driver profiling service to the insurance industry.

The Insure Telematics “driver profiling engine” takes data supplied by the tracking companies on specific authorisation from insureds, to create detailed profiles of every driver. This information includes speed, location and distance driven, as well as factors such as acceleration and braking patterns and the frequency of lane changes to provide an indication of driver attitudes. Insurance companies, in turn, use these profiles to offer completely flexible, personalised premiums for their clients.

The company says that personal client information is kept confidential at all times and that statistical information is used to create the risk profiles, without compromising the client’s privacy.

The Insure Telematics solution will make its global debut in Chicago this month at Insurance Telematics USA 2010, the first conference ever to focus specifically on this industry. “Telematics is going to drive the next wave of innovation in the short-term insurance industry,” observes van der Merwe. “People are no longer willing to accept basket premiums based on what demographic group they belong to. This technology makes it possible for members of traditionally high-risk groups, such as drivers under 25, to lower their premiums by proving that they are better drivers than their peers.”

Insure Telematics partnered with Tracker and local direct insurance company MiWay to launch and test the product locally as MiDriveStyle.

Another player in this market is T-Systems, which provides the necessary infrastructure for the pay-as-you-move principle: an on-board-unit (OBU) registers location and movement data via a global positioning system (GPS), analyzes the data and transmits it at regular intervals to a computer centre via the cellular phone network. From here it is available to the insurance company for risk calculation.

Good news for brokers

Insurance telematics is good news for brokers, too. The ability to offer clients tailor-made insurance products that are rated according to highly individual risk factors will assist brokers to attract new clients, offer existing clients improved solutions and premiums, and protect their loss ratios against those clients who pose the greatest risk of crippling claims due to poor driving behaviour.