Friday, May 27, 2016
In the data age it makes sense for businesses to take advantage of the improved capabilities of telematics, to save money and improve safety on their fleet operations. Brokers need to understand the issues and opportunities out there to maximise the benefit, says Justin Clarke, NIG's Director of Underwriting and Pricing.
A recent survey [SC1] by BIBA shows the number of live telematics-based motor insurance policies, including ‘black box’ policies, has increased by 40%. There was a significant increase of 132,000 policies compared with the previous year.
What is telematics?
Telematics is the combination of telecommunications with information collection, processing and sharing.
In the insurance context, it's a device installed in cars that monitors driving styles, and potentially when and for how long a car is being driven.
Who is using the technology?
Telematics has a strong foothold in the personal market of around 450,000 vehicles. It offers real advantages to a customer, with up-front discounts of up to 30% for new business in return for installing a device – representing significant cost-savings.
But it works both ways; insurers have found that the discount is justified by their claims experience. The customers don't mind the monitoring as they know they drive better than their peers with more traditional risk characteristics.
This has followed through to the commercial market where there are pockets of telematics use occurring in the commercial motor sector. The early adopters have typically been in more exotic risk areas, such as taxis and couriers.
How did telematics develop?
Fleet managers found the advent of telematics made their jobs much easier. The first systems were based around tracking vehicles to help them pinpoint their whereabouts. The tools allowed them to:
How can telematics now help fleet managers?
As new telematics systems have grown more sophisticated, managers can now get information on carbon emissions, fuel efficiency, speeding, harsh braking and estimated arrival times. New offerings are starting to tap into the wider data available from telematics ‘black boxes’ and provide a link back to insurers directly to help re-price and manage risk better.
How do the benefits stack up against cost?
As with all new technologies telematics is expensive. Typically it costs an insurer up to £100 to set up and manage a box, as well as the IT development on top of this to create the systems used to communicate and share information with the end customer.
Interestingly, the Government's Crown Commercial Service (CCS) worked with police, ambulance and local and central government to see how telematics could improve safety and efficiency in their fleets. Examples cited by the CCS of the potential benefits of using telematics include:
The CCS estimates that in realising these benefits public sector organisations should expect to save £3 for every £1 invested in telematics.[SC2]
What does the future for telematics look like?
Two developments are reducing the cost of using telematics for businesses, which opens up the market for brokers, says Justin Clarke. Firstly, mobile Android and Apple apps mean that a black box isn't necessarily required to be installed – it's simply on the driver's phone. But there are some worries that phone apps could be a potential distraction – and the phone needs to be in the vehicle to work. Plug-and-play devices that don't require installation have also been developed.
Secondly, the latest development is for manufacturers to build telematics systems into the vehicle from the start. A model has been put forward where the insurer could request a stream of telematics data from the manufacturer, with insurance being provided on this basis. This removes the need for expensive, standalone black boxes and enables a charging system more like that of a power company, based on what you use – pay as you go / real time pricing.
This is where the telematics market could really start to open up; as economic restraints start to fall away, it becomes a potential reality for all types of vehicles. The richness of the data is far greater and insurers believe that this level of information will be sufficient to generate a price. The availability of telematics data removes the need for the standard risk questions asked today for quotations.
Currently only a limited number of manufacturers have telematics as standard, but this will grow over the next few years. Investment bank RBC Capital Markets believes connected vehicles will grow at 25%+ [SC3] CAGR (compound annual growth rate) until the end of the decade, by which time more than 75% of vehicles produced will have some level of connectivity to the Internet. Consultancy McKinsey expects the growth rate to be more like 30% per year for the next few years.[SC4] But obviously this applies to new vehicles and most fleets aren't replaced every year.
What can brokers do to maximise the benefit?
Many of the telematics apps are currently being aligned to particular insurers. Brokers need to pay attention to this to ensure they are not being sidelined out of the relationship. White-labelled telematics solutions could be the ideal means for brokers to pass on the user telematics to their clients.
The development of telematics means flexible and pay as you go / real-time pricing looks set to change how insurance is transacted. There will be some advantages – if data is already available for a company from its black box, then this is likely to speed up decisions and pricing. But as insurers get better at this kind of pricing it will be interesting to see the effect this has on the flexibility around setting premiums which is a consideration for the broker market.
Addressing the issue of dealing with manufacturers is more complicated. This may require industry-wide solutions to ensure that an equable, democratic and workable solution can be found for brokers, manufacturers, insurers and end customers. The conversation with manufacturers needs to start now to ensure brokers interests are considered and how the long-term and far reaching implications for this technological development are applied.