Advances in telematics are transforming the insurance industry. Andy Goldby looks at the benefits this technology can bring
When the first motor policy was written back in the early 1900s, no guidelines existed for an industry more accustomed to insuring cargo ships than cars. A lot has changed since, with UK motor insurance spanning 20 million UK households and paying out £27m in claims every day. As we head full throttle into the Fourth Industrial Revolution - the data revolution - the industry is undergoing an unprecedented digital transformation, which some will find intimidating. But harnessing and mining the vast lake of Internet of Things data delivered by telematics offers a wealth of potential new insights. While this is a demanding task, the data derived from telematics provides actuaries with powerful new capabilities to price their policies and inform their understanding of risk. Traditional factors associated with age, postcode, profession and claims history are no longer the only indicators. Telematics introduces a new set of policy-holder scores based upon a true picture of their driving behaviour.
Telematics scoring predicts risk
Telematics providers work with insurers to deliver device-agnostic solutions, enabling insurers to take journey data from any type of device, including smartphones, which are powerful mobility sensors. It is possible to capture a variety of data. Firstly, sensor data which looks at GPS location, speed and phone usage and secondly, contextual data which records which roads are being driven, third-party transient data and other external benchmarks. Raw data can be translated into hundreds of KPIs for every journey.
For example, though distraction can be caused by many factors, perhaps the most significant is using a mobile phone. There is a clear relationship between having a high distraction score and a person's propensity to claim - distracted drivers are twice as likely to have an accident - so scores can relate to the time spent on a call as well as handling a phone while driving. Similarly, in terms of contextual data, telematics can understand the unique attributes of individual roads, analysing data in the context of external factors, such as how other people are driving, road layouts and pedestrian crossings.
At The Floow we have been developing these types of telematics solutions. Through various machine-learning techniques, data scientists analyse and score against six key components of our algorithm, which include speed, distraction, smoothness of driving, time of day, fatigue and road risk. By blending a set of behavioural scores as well as contextual scores, we've developed a scoring platform that is proven to challenge the traditional proxy-based model which assesses risk for an insurance policy.
Data gathered via client deployments over the past six years, suggests that telematics portfolios deliver a 25% improvement in burn cost. Its scores deliver a predictive power to create up to 10 times the difference in the likely claims frequency between drivers achieving a low score of less than 30 and a good score of over 80. Using this telematics scoring system alongside traditional rating factors (customer factors, vehicle factors and policy factors) can add significant value to the combined model's predictive power, adding five to 10 times the additional impact to adding credit scores.
When client actuaries and underwriters work with providers to further run the scores against their own claims data, they report a significant boost of up to three times the profitability per telematics customer, versus traditional policy types, and a set of scores that represent powerful and unique intellectual property.
This brings a new paradigm of fairness into motor insurance pricing, and many senior decision-makers in the industry agree. In a YouGov survey recently conducted among decision makers from international insurance companies, the widespread adoption of telematics is now seen to be dominant in shaping the future of car insurance.
When asked how the motor insurance industry would change over the next decade, all the top five factors mentioned relate directly to the application of telematics.
Identifying and predicting fraud
Fraudulent claims cost the industry many billions every year.
The ABI states that insurers detected 67,000 fraudulent claims valued at £837m last year but it's likely that many more went undetected, driving up the cost of motor insurance for everyone and impacting the profitability of insurers.
Telematics offers very useful indicators to help insurers identify dishonest drivers. As an industry, we will never be able to completely prevent fraud, but understanding potentially fraudulent behaviour before it impacts your bottom line helps improve the likelihood of preventing the damage it could cause.
The creation of indices has helped to detect how honestly drivers are using our telematics apps, for example, the patterns of how they tag completed journeys and a measure of the contiguousness of the journeys tagged where the policy-holder is driving (they may appear to have missing journeys or appear to be tagging low-scoring journeys as if they were a passenger).
Additionally, we have indices relating to the integrity of their declarations for mileage totals completed in the insurance year, or the 'risk address' where the vehicle is really kept and parked overnight. With these we are able to identify discrepancies which help to identify dishonesty within the early days of the policy, this enables insurers to make informed decisions on how to treat these customers before their 'cooling-off' period is over.
Responses to YouGov Research (March 2018)
43% Autonomous cars will have required insurance companies to totally rethink risk
37% There will be greater car charing replacing outright car ownership and move to usage-based insurance
37% Telematics will become the benchmark for defying risk and pricing of policies
35% Drivers will have an overall score for their driving ability affecting their premiums
34% The insurance industry will focus more on 'mobility' as an issue
To the future
Telematics will also help pave the way for autonomous vehicles. When a machine is programmed to make decisions in place of a human driver, who is to blame when something goes wrong? This is of critical importance to the UK motor insurance industry where classically it's the driver, not the vehicle, who is insured.
When a machine is in the driver's seat, it will be essential to understand the cause when an accident occurs. This kind of insight is only possible via the data that telematics can deliver, which is why we're collaborating with several industry partners in the MOVE_UK project. Together, the partners will see MOVE_UK accelerate the entry of automated, driverless car technologies to the UK market. It will increase the rate of development and testing of technologies at a lower cost to vehicle manufacturers, and lead on to see driverless technology trialled in real-world conditions on roads in Greenwich, London.
Telematics will be critical to the evolution of the mobility and insurance industries. As we find more ways to use telematics, it is clear that its insights will be a powerful contributor, making mobility safer and insurance smarter and more profitable for all involved.
Andy Goldby FIA, chief product officer of The Floow