The crossroads of auto insurance these days is telematics, the use of an electronic device to monitor how an automobile is being driven. The device monitors where a car is and how it is being driven, and, in theory, should help separate good drivers from bad drivers.
At the Casualty Actuarial Society’s recent Ratemaking and Product Management Seminar, actuaries learned how telematics works and how well it works in the insurance industry. They were told that actuaries are critical to making telematics successful in the future.
Jim Weiss, FCAS, who is Manager of Personal Automobile Actuarial, ISO Insurance Programs and Analytic Services at Verisk Analytics. spoke about how ISO developed its telematics product.
Jerel Cestkowski of American Family Insurance described some of the nuts-and-bolts issues in developing the infrastructure of customer service and claims that lie behind telematics. In addition, Allen Greenberg, a senior policy analyst at the U.S. Department of Transportation, described the government’s interest in telematics.
It turns out that learning driving behaviors doesn’t automatically help insurers achieve business objectives, said ISO actuary Weiss. Rather, careful execution and planning are required for usage-based auto insurance (UBI) programs to be successful.
Here’s how many insurers use telematics these days: If a customer is interested, the insurer gives the customer a device called a “dongle,” which is hooked into the car’s computer systems. Typically, the dongle monitors when and where a car is driven along with the length of the trip. Some devices can monitor the speed of the car, use of seatbelts, engine temperature, and “acceleration events”—for example, speeding up and braking.
If vehicle operators are more aware of such behavioral factors, they may actually become better drivers. Weiss pointed to studies indicating crash rates fell between 20 percent and one-third in cars monitored via telematics.
But monitoring an automobile is not cheap, he said. To illustrate, Weiss cited a hypothetical example where a dongle costs about $100 and lasts three years, and it communicates with the insurer via wireless, which costs about $5 a month.
For the insurer to “break even,” the savings from better driving must offset the costs of technology and any telematics-based discounts. In Weiss’s example, the loss ratios would have to drop 22 percent to justify a permanently installed dongle.
One alternative: Move the dongle to a new vehicle every six months. That’s enough time for long-term driver behavior to improve, but at much lower cost per vehicle. Using the same assumptions, loss ratios would still have to fall 13 percent to break even, Weiss estimated — which makes the economics more workable.
For an insurer, actuaries would need to show all that work is worth it. Over the decades, actuaries have developed a powerful set of rating factors. In recent years through predictive modeling, actuaries have refined their craft even further.
Those old factors do an acceptable job — almost as good as early generations of telematics, as Weiss showed by example. In a traditional rating plan, younger drivers are a higher risk. The risk ebbs as the driver ages, then increases a bit as the driver heads past middle age.
By comparison, basic telematics track, for example, the propensity to slam on the brakes, which can be a sign of an inattentive driver. ISO found that young drivers tend to slam on the brakes often. The tendency ebbs as they get older, then increases a bit around age 60.
In other words, the telematics research affirmed the old rating factor.
At ISO, the actuary’s job became to tease out the added precision the telematics offering provided using multivariate modeling approaches. The result: Telematics gave ISO’s rating plan significant “lift,” meaning that — according to vehicles’ telematic scores — the riskiest 20 percent of operators’ expected claim costs were 10 times higher than those of the least risky 20 percent, even after the effects of a traditional rating plan were considered.
Monitoring the driver and developing the rate are important, of course, but Cestowski of American Family pointed out that telematics creates other expenses and challenges.
For example, in the areas of customer service, Cestowski said, the device opens up a new set of questions that a company’s representatives must know how to handle, questions including:
- How do you install the dongle? (The answer differs, he said, depending on the model. And company reps will have to know them all.)
- Do you share data with police? (No.)
- What data does the device monitor?
- When will I get my discount?
A company must either train its current support staff or create a new level of specialist to handle telematics questions.
“You’re going to have to invest in education and resources to handle this in your support areas,” Cestowski said.
Agents will need training, too. At companies like American Family, the agent is often the first person a customer calls. The agent will have to understand the product and its nuances.
The introduction of telematics will have an impact on marketing issues, such as should the product be used to target new customers or try to retain existing customers? And there are privacy considerations, which constitutes one of the main reasons consumers hesitate before trying a telematics product.
Even with the logistical challenges, telematics remains an insurance concept the federal government tends to favor, said U.S. Department of Transportation Analyst Greenberg.
Operating an automobile is deceptively expensive, he said, because most costs—the car itself, parking, vehicle taxes and fees—are fixed. There is little incentive to avoid using a vehicle, he said. Even high gas prices don’t make that much difference.
Telematics convert one of those fixed costs, insurance, into a variable cost. If people understand the cost-per-mile to operate a car, they drive less. That leads to a host of social benefits: fewer crashes, less congestion, less pollution and less urban sprawl.
Source: Casualty Actuarial Society