Telematics could replace the need for credit scoring in the future

31 Oct 2011

As the insurance industry's use of predictive analytics evolves, innovations like telematics based "pay as you drive" auto insurance may reduce the need for proxy underwriting factors such as credit scoring.

With the electronic transmission of driving data including speed, distance and braking patters from vehicles, insurers are able to assess the driver's risk of having an accident and charge insurance premiums accordingly. "You get price accuracy, reduced accident frequency and the reduced accident frequency comes from providing scores back to drivers, telling them when they drive well and when they drive poorly...", Brian Stoll, director of Towers Watson names the benefits of telematics. "From a regulatory standpoint, telematics has been received very favourably in the United States to the extent that it really represents driving behaviour and driving experience. It replaces the proxy that is credit score and other tools that have historically been used to differentiate risks that relate less directly to the exposure of individual people driving their vehicles."

According to Stoll, telematics is one of a number of innovative insurance programs to come out of the use of predictive analytics, which is a highly sophisticated form of using data to refine underwriting. Others include disappearing deductibles and accident forgiveness.