Powered by the IoT, auto insurance is poised for a revolution

Connected cars promise to make car insurance more precise, personalised and convenient.

A shift in telematics-based applications for insurance is upon us.

Until now, insurers’ ability to capture driving behaviour insights for UBI, or telematics, programmes 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 (Figure 1). 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.

 

The availability of information about a consumer’s driving and other behaviour prior to policy issuance opens the door to groundbreaking opportunities in marketing, underwriting and pricing for UBI carriers.

Insurers must address three critical areas to effectively leverage telematics data:

How to manage voluminous, multisource data and organize technology resources
How to synthesise robust driving and location data into meaningful content for consumers
How to integrate policy prequalification data from telematics sources with traditional rating and underwriting methods

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 monetise 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. The availability, accessibility and use of new data sources are steadily rising. For example, according to the Pew Research Center, 90% of U.S. smartphone owners use their smartphones for location-based information. Many of these apps are collecting interval location data that could become a useful source of information for insurers.

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. Different standards among data providers will require further work by insurers to prepare their systems. This challenge potentially reinforces the advantage of market-leading telematics innovators. A number of these insurers are already moving forward and establishing partnerships with organisations that can provide supplemental data from connected cars and the 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.

Consequently, getting the most value out of this diverse and growing pool of data will require a flexible technology platform and sophisticated analytics. Although many insurers in the U.S. and around the world either are updating or have recently modernised their systems, most have initially focused on reorganising existing data and information. Many will need to widen their scopes to support new, dynamic data sources for current or future UBI policies.

But even when such data are accessible, only sophisticated analytics will turn them into useful information. The most granular data sets typically reveal truly risky driving characteristics that can then be applied to less detailed data. However, more data doesn’t always correlate to better insights if you don’t have the right analytics. We have determined from our own analysis that some UBI driving scores in use today actually create less value than simply analysing mileage.

To illustrate the game-changing impact of telematics data, Figure 2 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.

 

Use data to become more customer-centric

Information about when, where, how and how much a vehicle is driven is useful for an insurer and for capturing the attention of insureds. Well-documented studies show how telematics-based insurance products improve driving behaviors and fuel efficiency, and reduce distracted driving. But 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 customised products and increased customer engagement.

Insurers will need to understand what information customers want and how to package it in an accessible format for personal devices, as well as master the technical exercise of creating consumer-friendly content from massive quantities of data. This will likely require many insurers to shift emphasis from traditional practices. Already, we are seeing companies invest in new strategic approaches, acquire design and digital expertise, and integrate lessons from behavioural economics, all in an effort to improve the customer journey.

New data sources can also help insurers apply lessons learned by companies that have an established record of anticipating and servicing 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 (Pokémon Go, anybody?). Innovation benchmarks set by these companies will increasingly apply to customer service across the board.

An expanded data universe also offers UBI carriers more options to engage with customers beyond policy renewal with regular touchpoints. This will require an insurance carrier to transform detailed, granular data into timely, meaningful and intuitive insights for the driver. Consumers, in turn, may benefit from a combination of incentives and rewards complemented by effective communication to encourage safer driving.

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 U.S. insurers that have collected and analysed 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%. These companies have the experience and insights to know which insureds warrant such substantial discounts. The market leader attests that insights gleaned from telematics data are more powerful than any other current rating factor, proof of their predictive power. In addition, several companies have begun to vary the weighting of traditional pricing factors based on what they have learned about actual driving behavior.

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 — if they develop and, crucially, execute a plan. 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 away-at-school and garaging ZIP codes). An insurer could then adjust traditional factors that are proxies for true driving exposure (Figure 3) and use data available from new data sources prior to making a quote.

Know the customer

Recent press reports cast doubt on UBI’s success and may cause some insurers to question the value of integrating new data sources. While some U.S. insurers are seeing UBI take-up in roughly 30% of new applications, a major stumbling block for mass-market (majority) UBI acceptance is the lack of point-of-sale driving data. In effect, many drivers, with the general exception of young drivers with higher premiums, can’t really be sure if they’re going to benefit from a UBI policy until they have one. That will change as more insurers and data providers, such as auto manufacturers and consumer electronics companies, get together to capture driver behavior before a policy is bought. More data equals greater opportunity for providers to differentiate products.

Clearly, insurers and data providers will need to establish new partnerships to leap forward, such as Progressive’s teaming with OnStar and Subaru’s announced pairing with Liberty Mutual. Data exchanges, such as Willis Towers Watson’s DriveAbility Marketplace, that simplify the process for generating additional value from both driver scores and consumer data, will undoubtedly play a role.

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 programmes for insurers at Willis Towers Watson, Chicago

Geoff Werner specialises in telematics and IoT data solutions for insurers and data providers at Willis Towers Watson, San Antonio