Telematics: Reinventing Auto Insurance Part III
20 Sep 2010
In our previous entry on telematics, we addressed the opportunities and challenges the industry has faced in adopting telematics, and the measures that will increase the likelihood of success. This article looks at some of the possible business models insurance companies can adopt around telematics.
Catching the Tail Wind. In the United States, Progressive is the telematics forerunner - its Snapshot offering is now available in more than 20 states, and the company is in the midst of plans to go national. In addition, based on the lessons from their 150,000 plus customers who signed up for telematics, Progressive has fine-tuned its product offering. It has expanded beyond pay-as-you-drive features by including more feedback and emphasis on safety and improving driving behaviors. It has also improved the customer benefits, offering improved rates sooner and working to allay privacy concerns. Elsewhere, the benefits have been proven in early segments-commercial fleets use telematics to monitor employees' driving behavior to improve asset utilization, reduce fuel consumption and improve safety; the parents of teen drivers are also asserting their right to monitor their children's driving more closely to improve safety. For all auto insurers, however, we believe there is a huge well of opportunity waiting to be tapped, with significant momentum awaiting those companies that can break through. Telematics is coming, and for insurers the change will be rapid. Once the leaders convince customers of the compelling value of telematics-lower premiums for good driving, in-car entertainment and real-time traffic data, to name a few-customers' privacy concerns will begin to wane.
In particular, rate improvements for customers may be dramatic. Progressive has indicated that good drivers can receive premium reductions of 40 percent through telematics; other insurers see potential reductions as high as 50 percent. Research in Europe has found that telematics users who receive in-car safety tips see their driving improve and, therefore, their rates decrease.
What factors will push telematics to the forefront in the future? Technology. As telematics advances, the technology behind it will become cheaper, and easier to obtain and provide greater levels of information, both for insurers and customers.
Consumer confidence. As customers' privacy concerns begin to drop, the technology becomes less intrusive and early adopters experience the offering, consumers will become more comfortable with usage-based insurance. This greater comfort, combined with increasing value, will drive growth in the telematics market.
Government reinforcement. With fuel consumption, emissions and highway safety among top goals for governments, many are evaluating telematics as part of the answer. For example, California recently approved regulations to support insurance based on mileage information to encourage people to drive less.
"Following the leader." The idea that telematics is a niche or specialty area within insurance is being proven wrong. The success of Progressive is proving that telematics can be scaled, and that it has mass-market appeal. Indeed, as the market for usage-based insurance grows, insurers on the outside will face adverse customer selection and declining profitability, meaning they will have to enter the market over the long term.
Emerging Models for Telematics. The advance of telematics technology opens a wide spectrum of opportunities across many dimensions: data, customer interaction and vehicle integration. On the data front, it can provide anything from basic usage (mileage, time) to comprehensive vehicle performance information leading to total cost management. Customer interaction could include combination with vehicle protection and communication systems. Telematics could even be offered as an integrated product, for example with driver assistance systems to enhance driving safety. We envision several telematics-based models will emerge, with varying levels of customer interaction and integration:
Pay as you drive (PAYD). This mileage-based system is a starting point. While this model has been around for some time in different forms, most have already moved on to more advanced systems. A device is installed in a vehicle to validate mileage, when a car is driven and potentially where.
Pay how you drive (PHYD). In addition to collecting mileage and GPS-based data, driving style and behavior is also considered. The average driver has one accident every 10 to 12 years, but much more common are unsafe driving maneuvers that increase the likelihood of an accident. To understand driving behavior and predict accident claims better, an accelerometer can provide event data, such as abrupt acceleration and deceleration, hard braking and sharp turning. Progressive has led the way in the PHYD space, but most other companies are exploring this space today, particularly for commercial fleets.
Control your driving (CYD). PAYD and PHYD are passive in nature, more about collecting data rather than interacting with the consumer. CYD goes to the next level by using the data to provide constructive feedback to drivers through the in-vehicle interface and potentially improving driving habits. Academic studies, research by telematics vendors and insurers' market tests clearly indicate that drivers can improve with positive and effective feedback. The teen and elderly markets are niche markets that are early adopters of this model.
"Cocoon of safety." This refers to systems installed in vehicles to provide all-around safety and driving assistance. The systems usually include services such as adaptive cruise control, collision warning, lane assistance and blind-spot detection. This model is growing fast in the auto market, driven by the safety benefits of reduced driving risk. New technology could enable additional services and features, such as safety controls activated when poor road conditions are sensed by the GPS. Telematics could also bring management functions together to provide enhanced driver coaching and other services.
Embedded vehicles. Along the lines of the cocoon of safety, vehicles embedded with telematics devices are the long-term aspirations of both insurers and automakers. Manufacturer-installed technology would provide the information and customer feedback necessary for the selected insurance model. Insurers costs would go down, as they would be responsible only for data fees but not technology and installation.
Several major automakers have already begun down this path. General Motors has installed OnStar systems into its cars, while Ford and Microsoft have partnered to introduce the Sync system into Ford cars. Another Asian manufacturer is planning to launch an embedded telematics system into its product lineup within the next two years, offering various applications that will improve the driving experience by allowing for the sending, receiving and processing of information. Some analysts project that all major manufacturers will have embedded telematics solutions in their cars within the next five years.
The Telematics Future. Collaboration between insurers and car manufacturers is only a beginning. Other markets-particularly mobile-could open up as areas where collaborative efforts could reap significant gains. Of course, these collaborations highlight some of the risks for insurers, which could find themselves losing control of the in-vehicle insurance market to car and device makers who take insurance into their own hands.
New business models will yield new customer value propositions, a new customer experience and new revenue streams. The traditional auto insurance model-buy a policy, and interact only on periodic payments and accident claims-will be replaced by a new, interactive model in which insurers offer insurance along with a lot more that customers value.
The future model of telematics will be mutually beneficial for the customer, the insurer and all other parties. While the technology is still young and there are many speed bumps ahead, the winners will quickly develop an understanding of telematics and usage-based insurance, and come up with the right strategy to capture the best customers as quickly as possible.
About the Authors: Mike Hales is a partner in the Chicago office and can be reached at mike.hales@atkearney.com; Joe Reifel is a partner in the Chicago office and can be reached at joe.reifel@atkearney.com; Gang Xu is a principal in the Southfield office and can be reached at gang.xu@atkearney.com.
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