Katie DeGraaf and Geoff Werner, Willis Towers Watson
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Powered by the IoT, auto insurance is poised for a revolution | Canadian Insurance
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Powered by the IoT, auto insurance is poised for a revolution

By 2020, analysts expect 150 million connected cars to be in circulation globally

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A shift in telematics-based applications for insurance is upon us. Until now, insurers’ ability to capture driving behavior insights for usage-based insurance (UBI), or telematics, programs faced constraints: technology costs; dependence on the insured to install a device, download an app or otherwise provide data; and intelligence gathering that begins after a policy issuance.

New data sources such as connected cars, consumer purchased devices and location-based apps are starting to break down these barriers. This is happening quickly. The vast majority of insured drivers already have smartphones. And by 2020, analysts expect 150 million connected cars to be in circulation globally.

Managing multisource data

The range of data sources that the industry may be able to tap into is substantial, and data generators are keen to monetize these assets. Insurance — UBI in particular — is seen as an obvious hunting ground. Many auto manufacturers, telecommunication companies, consumer electronics manufacturers and location-based-app providers already offer a potentially rich assortment of valuable customer insights.

Such data variability from different providers will challenge insurers. For example, while one source may be able to deliver granular, sub-second driving data that detail every vehicle maneuver, another may provide only a high-level summary of each trip. This challenge potentially reinforces the advantage of market leading telematics innovators. A number of these insurers are already moving forward and establishing partnerships with organizations that can provide supplemental data from connected cars and the Internet of Things (IoT). Insurers that aren’t able to adapt are likely to face further adverse selection, leaving them with a policy portfolio of higher-risk drivers.

To illustrate the game-changing impact of telematics data, Figure 1 shows a sample of drivers subdivided into risk deciles based on pooled telematics data (with Group 1 being the safest drivers and Group 10, the riskiest). The height of the bars shows the expected loss cost for each risk group, and the line represents the premium charged. The gap between the two illustrates a sizable opportunity for insurers with telematics data to more accurately price premium.

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Use data to become more customer-centric

Integrating a wider variety of data may require a fresh look at the skills needed by insurers to enhance customer experiences. For example, communicating positive UBI outcomes frequently relies on providing the right information to the consumer at the right time and in the right format. As data volumes increase and the level of detail provided by individual data sets becomes more variable, the task will be complicated, but it will also create opportunities for more customized products and increased customer engagement.

New data sources can also help insurers apply lessons learned by companies that have an established record of anticipating and serving their clients’ needs by using data. For example, research shows that one in four users will abandon an app after only one use, while push notifications, in-app messages and email notifications can improve consumer retention. Companies like Amazon, Uber, Google, Zappos and Netflix have proven track records of building and maintaining loyal consumer bases in a fragmented market full of new gadgets and apps that distract the consumer.

The path to market-disrupting rating and underwriting

The proliferation of data has already changed rating plans, leaving the market in various stages of development. Seasoned insurers that have collected and analyzed detailed UBI driving data about how, when, where and how much people drive now offer discounts up to and over 50%, with average discounts trending between 15% and 25%.

Obviously, insurers with more in-depth experience in handling driving behavior data are at a real advantage to create market-disrupting rating plans as new data sources come on stream. Yet this doesn’t preclude other companies from joining the party. Companies will typically begin by learning more about which driving behaviors are actually causing claims and industry resources that can help deliver risk segmentation “quick wins.”

While gaining scale, there are some significant incremental changes that companies can begin making to ensure rating stays aligned with occurring and anticipated changes. For example, with just a little experience, a company could start by validating current rating assumptions (such as mileage and garaging postal codes). An insurer could then adjust traditional factors that are proxies for true driving exposure and use data available from new data sources prior to making a quote.

Success in this changing auto market will likely depend on the acumen to harness data, engage customers and price accurately. While the desired end state is lofty, insurers can incrementally use these vast and growing data pools to create relevant, differentiated products that satisfy changing consumer expectations.

 

Katie DeGraaf specialises in customised UBI programs for insurers at Willis Towers Watson and is based in Chicago. Geoff Werner specialises in telematics and IoT data solutions for insurers and data providers at Willis Towers Watson. He is based in San Antonio.