Auto insurers in Europe may use black box technology to set rates

20 Dec 2011

Motor insurers looking for a solution to get around a European ban on charging male drivers more than women are turning to innovative black box technology that could trigger an upheaval in the way car insurance is sold.

Among those testing the technology, which allows insurers to monitor driving habits and charge their customers individually, is Britain's biggest motor insurer, Royal Bank of Scotland. Previously deterred by the high cost of telematics insurance, insurers now consider it as their best hope for acoiding price hikes that could drive customers away once the ban is executed.

"There's a renewed interest, not least because of the gender directive," commented James Rakow, insurance partner at consultants Deloitte. "Most definitely, this second wave of interest seems to have got a foothold in the market."

According to a research commissioned by Germany's GDV insurers' lobby, women who drive statistically safer than men and where therefore less charged, face an 11 percent price increase. Insurers fear that could price some women drivers out of the market altogether, sapping revenues. Using telematics to set premiums according to customers' risk profiles allows the industry to keep offering lower prices to most women while staying on the right side of the law.

Chief executive of British start-up Ingenie, Richard King, stated that insurers' renewed interest in the technology also reflects a drop in its cost. "The technology has got an awful lot cheaper and a lot more sophisticated. I think it reached its tipping point last year."

In 2009 Britain's second-biggest insurer, Aviva, was forced by high overheads to abandon Europe's first major trial with telematics insurance, although the experiment achieved a 27 percent cut in premiums while reducing claims by almost a third. Aviva said it „continues to evaluate the technology."

Telematics is gaining ground worldwide, with insurers accounting for 60 per cent of the U.S. market offering some form of the technology, as are big European players including Allianz and Axa, according to risk management consultant Towers Watson.

But analysts say British insurers are leading the way in using telematics to build up a complete picture of driver behaviour, and the industry hopes this will over time allow it to actively persuade customers to drive more safely by offering lower premiums as a reward, triggering a virtuous circle of falling claims. The European Union's "eCall" initiative, which aims to ensure that by 2015 car makers fit vehicles with devices that automatically dial for help in the event of a crash, could give telematics insurance a decisive boost by allowing it to piggy-back on a ready-made technological infrastructure.

However, analysts warn that the take-up of telematics technology by the mass insurance market could have profound consequences. The disappearance of standardized pricing would likely challenge so-called aggregator websites such as Admiral's Confused.com, which allow consumers to compare quotes across the market, and have become one of the biggest sales channels for motor insurance in the UK.
By making explicit the connection between safe driving and cheaper insurance, telematics could also encourage car makers to offer cheap coverage as an incentive to buy vehicles fitted with extra safety features, encroaching on insurers' territory.
"In that circumstance the insurer is demoted to a wholesaler and the car maker becomes the broker," said Tony Lovick, a Towers Watson consultant and former Aviva executive. "If I was an insurer I'd be thinking about that and wondering how I could immunize myself against more market upheaval."

With the decision of the European court of Justice, insurers must stop charging men and women different prices from December next year.