Telematics — specifically usage-based insurance rates (UBI), or “pay-as-you-drive” — has proven to be a game-changer in the auto insurance industry. In a May 2020 customer sentiment survey, J.D. Power found that 40% of drivers were contemplating UBI due to the potential cost savings.
In a nutshell, telematics systems provide data to insurers that allows streamlined rate setting. This improves customer retention and encourages safe driving, which in turn reduces claims and overhead.
But these benefits aren’t limited to auto insurance. Property and Casualty (P&C) insurers can take a cue from the UBI trend and look for similar solutions in other P&C spaces, such as homeowners or renters insurance.
What Is Vehicle Telematics?
Vehicle telematics is an interdisciplinary field involving vehicle technologies, telecommunications, computer science, and electrical engineering. Telematics systems provide vehicle data that can be useful in a variety of industries — including insurance.
Telematics systems can provide a variety of useful information, such as:
- Driving time
- Trip time of day
- Speed at various times and locations
- Acceleration, braking, and cornering data
This kind of data is useful in myriad ways, from vehicle tracking for rental companies to analysis of wear and tear, marketing and demographics, and perhaps of most interest to insurers: tracking driving habits.
How Usage-Based Insurance Changed the Game for Auto Insurers
The so-called “safe driver’s discount” or pay-as-you-drive model of rate setting began nearly two decades ago when General Motors Assurance Company (GMAC) and Progressive Insurance Company both pioneered mileage-based discounts using GPS and cellular data. This kind of usage-based insurance offering has since evolved into the model we see today: Insurers rely on telematics to access data that can enable superior risk prediction.
For instance, drivers who drive fast for long distances or continually brake hard and take corners at high speeds are at higher risk for accidents than ones who drive slower, drive fewer miles, and drive more conservatively. In fact, a study by Towers Watson over a decade ago estimated that crash rates declined as much as 80% in commercial fleets that were monitored by telematics technology.
In the years since, insurers have leveraged this technology to customize rates based not only on how much customers drive but on how they drive, as well.
Benefits of UBI
UBI is a win-win for customers and insurers. Insurers can more accurately predict risk, which allows for streamlined rate setting. Policyholders are more satisfied because they have control over rates, which in turn improves retention. More than that, customers are motivated to drive safely — and better empowered to do so — which reduces accidents, limits claims, and lowers overhead for insurers.
Telematics and UBI go even further than that; they may increase customer base. Seventy-two percent of millennials think UBI is a good way to set rates. Not only that, but driving less reduces emissions. It can also help insurers reduce fraud, assess accident damages, and find efficient routes for fleets. Telematics can even improve accident response time and make it easier to track down stolen vehicles.
Beyond the Auto Space: UBI Insurance for P&C Carriers
If telematics systems can help auto insurance customers lower their premiums, can a similar approach help homeowners lower their insurance premiums as well? Yes, P&C insurers who provide other types of insurance may indeed find something of value in the UBI model.
In fact, telematics and P&C insurance may be a match made in heaven. Smart home technologies are already becoming more mainstream. The penetration of smart home devices is expected to hit 57.2% by 2025, and almost half of millennials have at least one smart home device. As these devices become ubiquitous, so do opportunities for P&C carriers.
Technologies such as in-home cameras can catalog contents in the home to make claims filing quicker and easier. Home security hub apps can integrate with insurance apps, providing positive touchpoints for clients, who often only interact with insurers during a claim.
That’s only scratching the surface. Smart home tech opens up numerous data channels for insurers:
- Environmental sensors — from thermostats to flood sensors to smoke alarms — can provide insurers with sophisticated usage and risk data.
- Smart locks contain entry data.
- Smart lights can track energy usage.
- Entry alarms offer evidence in case of a break-in.
All of this data can provide the same kind of accurate rate-setting opportunity as vehicle-based telematics. This “pay-as-you-live” model has the same potential benefits as vehicle UBI and implementation is as simple as gathering data and applying the same algorithms auto insurers are already using.
The benefits of these insurance telematics technologies also extend beyond the home. Small business owners with smart self-monitoring systems can benefit from all the same analytics and rate-setting advantages, using the very same technology.
The Future of Telematics in Insurance
It’s clear that smart home technologies are here to stay, and the results of auto telematics have been unquestionable. It stands to reason that telematics will be important in the home and business insurance space in the years ahead.
Still, obstacles remain. First of all, there are privacy concerns with sharing this much information with insurers, and some customers may balk at the intrusion. Second, given the complexity of the algorithms needed to analyze all this data, roadblocks will inevitably present themselves.
The good news is that algorithms and rate-setting models are already well established in the auto space, and customer concerns can be addressed with opt-in programs and strict privacy policies. How insurers can use telematics in coming years is already foreshadowed here and now. The future looks bright for a more streamlined and cost-effective strategy — one which can benefit insurers and customers alike.