New data processing tools will bring changes to the insurance business in the future.
New data processing tools will bring changes to the insurance business in the future.
( Source: Public Domain / Unsplash)

Telematics How telematics data is transforming car insurance

Author / Editor: Jamie Thomson / Erika Granath

With car insurance premiums expected to rise over the next few years, drivers are increasingly looking to technology to reduce the cost of their insurance. One technology that’s leading the way in lowering premiums is telematics.

By combining telecommunications with vehicular technology, insurance companies can monitor various elements of a driver’s behavior. A GPS system and on-board diagnostics make it’s possible to record a car’s exact location, how fast it's traveling, and what’s going on internally, in terms of the driver’s actions. For a technical overview of how telematics work inside a vehicle, take a look at our introductory post on the topic.

In car insurance, telematics data is gathered through a black box that’s installed inside cars. It records a driver’s behavior in exchange for a customised premium. Mobile apps and plug-and-drive devices can also be used to gather driver data.

This use of telematics in insurance is collectively referred to as ‘usage-based insurance’ (UBI), or ‘pay-as-you-drive’ insurance and it’s gaining in popularity globally. Allied Market Research predicts that the UBI market will grow by 36.4 percent from 2016 to 2022.

Let’s take a closer look at how telematics data is transforming car insurance:

Rewarding safe drivers

According to telematic system developers The Floow, 32 percent of UK insurers say they need access to data on driver behaviour to tackle the rising problem of driver distraction. The insights that telematics provides about our driving habits, enables insurers to develop customized UBI policies that reward safe driving.

By analysing variables like how much you accelerate, how often you brake, your turning speed and whether you indicate, insurers can use the data to create an accurate risk profile that determines your insurance policy. Drivers who have a low risk profile, are provided with the lowest-cost options.

Today, most car insurance companies provide UBI policies, whereas some insurers like Root Insurance, solely use telematics to create their offerings.

Big revenue potential for insurers

Telematics means big business for the automotive industry in general. According to Mckinsey, vehicle telematics data could create US$1.5 trillion in future revenue for automakers alone. For insurance companies, driver data can be monetized and repurposed in various ways, such as selling it to advertisers, or car manufacturers.

At its core however, telematics helps insurance companies manage risk by reducing the number of payouts they make to customers.

By charging premiums in exchange for cover, insurers can reinvest profits into other assets, such as bonds, stocks, and liquid short-term investments, thus diversifying their risk even further.

Privacy and Data Protection

According to a study conducted by Berg insight, 47 percent of new cars in North America have telematics systems installed, and in Europe, the figure is 40 percent.

Because telematics data can include personal information, it’s subject to data protection laws. Insurers therefore need to follow relevant compliance procedures for all data that isn’t anonymized.

The exact procedures that insurance companies need to follow vary depending on the country. In the UK, for example, the Association of British Insurers (ABI) say that companies need to obtain the consent of all named drivers on a telematics policy before personal data can be collected. As such, this can have an impact on what kind of data insurers can sell to third-parties.

The Future of Telematics in Car Insurance

According to Statista, by 2030, 70 percent of light-duty vehicles will be connected to the internet. This provides the potential for cars to be connected to smart cities and be able to communicate with traffic management systems using Artificial Intelligence (AI) and Machine Learning (ML). Insurers will therefore have access to a lot more real-time data, which can be used to create even more accurate risk profiles and policies.

In the short-term future, this data can also be used to analyze the circumstances of road accidents, rather than relying on witnesses and testimonies. The data will ensure that more accurate insurance payouts are given.

Longer term, as autonomous vehicles take to our roads, the car insurance industry may experience a reduction in premiums. It’s estimated that driverless cars will remove 90 percent of the risk associated with driving. As AI takes the place of human capacity to cause accidents, the car insurance business model will likely evolve as the risks associated with driving shift from the drivers themselves, to the companies that manage the vehicle’s autonomy.

For an additional overview of how telematics systems are being used by insurance companies, check out this video from the Financial Times: