As more vehicles integrate sensors and other connected technologies, auto insurers are racing to keep up.
Digital technologies are disrupting business-as-usual for pretty much every marketplace in America. This is especially true in the insurance industry, where digital technologies are expanding insurer access to client data and streamlining administrative processes across the board — but telematics is perhaps the most impactful of these developments.
“Telematics” refers to a group of vehicular devices that combine telecommunication with data analysis. In the auto insurance industry, telematics has mainly been associated with Usage-Based Insurance (UBI), which involves collecting data from individual drivers or cars and then assessing that data in order to individualize the premiums and claims associated with each policy.
With an estimated 12 million drivers already using UBI policies (and with 142 million more expected to do so by 2023), the changes brought on by telematics are fundamentally altering the insurance industry. For your convenience, we distilled this transformation down into four primary categories of changes that telematics will bring.
1. More Connected Vehicles On the Road
First and foremost, telematics are ushering in the era of the “connected car.” Even as more drivers seek to exploit the benefits of telematics, auto manufacturers are bringing new technologies to cars themselves: by 2020, almost 90% of cars will have embedded connectivity in the form of sensors or smartphone integration.
To understand why this is so transformative, a little context is necessary. Because self-driving cars are also entering the equation at the same time as telematics, the value of detailed information that underpins risk-based assessment of driving behavior is increasing rapidly. These autonomous vehicles won’t just gather data about their own driving practices — if self-driving cars analyze how human drivers behave alongside them, telematics can help to reward lower-risk human driving behaviors like tailgating, obeying the speed limit, and driving sober.
2. Reduced Cost and Processing Time of Claims
Because telematic sensors are constantly recording information, speculation about the parameters around an accident become less time-consuming. Additionally, the instant feedback from collisions immediately notifies insurers, which can help cut down on processing times (sometimes by as much as ten to 15 days, a significant improvement).
Another obvious benefit of a telematics-driven policy is significantly reduced costs from fraudulent claims: studies have shown that telematics policies can result in reduced claims stewardship costs by a whopping 25%. All in all, this expedited and crystal-clear assessment protocol makes the life of insurers much easier — and for a bit of icing on the cake, insurance policies that embrace telematics see on average 50% fewer claims than non-telematics policies
3. More Accurately Priced Premiums
In the past, premiums were determined based on a set of facts about the policyholder (or driver). Because some of the criteria used in risk assessment were particularly esoteric (like credit score, for example), this process typically resulted in premium costs that didn’t necessarily match up with the behavior of individual drivers.
With telematics, insurers can more accurately monitor driving behaviors, determine the risk they assume, and assess whether the driver is responding appropriately to feedback. As insurers gain an increased capacity to individualize premium rates (and entice potential clients with the prospect of fairly-priced policies), they also save money by understanding their assumed risk more accurately.
4. Millennials Just Love Telematics
Millennials are embracing UBIs to a substantial degree: one study suggests that 88% of millennials are “interested” or “maybe interested” in UBI policies. Millennials are less worried about telematics privacy concerns than Baby Boomers or Gen Xers, and they’re also significantly more inclined to change their driving behaviors if it leads to lower premiums. Because Millennials will make up one of the largest policyholder demographics, their preference for UBI is exerting a profound influence over the direction of the auto insurance industry.
Perhaps most significantly, telematics has helped to spur a proactive attitude among insurers. Due to the increased availability of data regarding driver behaviors, insurers can recommend changes in driving, alert drivers to travel conditions, and more accurately understand the context around claims. Moving forward, savvy insurers will adopt a “we’re here for you before you need us” approach (as opposed to “when you need us, we’ll be here”).