How Insurance Companies Leverage Telematics to Adjust Insurance Premiums

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Mateusz Hapon

Updated Apr 6, 2021 • 6 min read

Together with the rise of user-based insurance (UBI) policies, telematics is one of the digital innovations bound to have a massive impact on the insurance industry.

Thanks to telematics, insurers get to increase their frequency of interaction and proximity with customers to offer extra services, boost their profitability through specialization, and develop a better understanding of risks and customer behavior from the collected data.

Telematics is reaching maturity on the Italian market, where 16% of auto insurance contracts feature telematics devices, allowing insurers to adjust premiums on the basis of the driver's behavior instead of on a snapshot of static data.

Read on to find out what telematics is all about, what benefits it brings to insurers, and how it works in practice in 3 case studies.

What is telematics and how does it work?

Telematics insurance is a type of car insurance that takes advantage of devices such as smartphone apps, cigarette-lighter plugs, smart tags, and onboard diagnostic devices.

The most common technology in telematics are black boxes fitted into customer vehicles. They’re equipped with a GPS system, a motion sensor that provides information about the impact on the car (for example, as a result of an accident), a SIM card for transmitting data, and software that controls how the data is transmitted and analyzed. Black boxes are the most popular alternative because they provide precise data that is very hard to manipulate.

However, smartphone apps like Zendrive may play a significant role in driving the telematics revolution if they prove to be accurate and reliable.

A telematics box measures various aspects of a customer's driving and sends the data to the insurer. The company can then analyze it to learn how safely the customer drives and adjust their premium accordingly.

Insurance companies develop programs where driving safely allows customers to earn rewards and, once they decide to renew the policy, use telematics to calculate new premiums from individual data about the customer's driving.

Benefits of telematics for the insurance industry

Telematics opens the doors to developing user-based insurance (UBI) programs that match the current consumer demands regarding personalization and specialization. On the Italian market, 65% of insurers who joined the Connected Insurance Observatory saw a positive impact of telematics on their competitive advantage.

Insurance companies can use telematics data for assessing risk and calculating renewal premium costs. A smashing 90% of insurers surveyed by Willis Towers Watson said that telematics is going to impact rating and pricing within the next five years – and 80% of them believe the same is true for underwriting and risk selection.

Insurers also take advantage of telematics for processing and managing claims. Telematics will play an increasingly important role in claim triage and analytics, as well as loss control. Some insurance companies are already using this technology to track the location of stolen vehicles, provide assistance after accidents, and gain a better understanding of accidents to recover money from the person responsible.

Ultimately, telematics helps to reduce the costs of car insurance and increases road safety by raising driver awareness.

Telematics in action

Here are 3 case studies that show how insurance companies use telematics today.

1. Nationwide

The US-based insurer Nationwide decided to invest in UBI and developed a telematics insurance solution called SmartRide. This usage-based insurance program uses an OBD device plugged into the onboard diagnostic port of the car to collect mileage information and driver behavior data. Customers receive coaching and feedback based on their behavior and get to earn discounts up to 40% for safe driving.

They also get a 10% discount during the first policy period upon enrollment. After a successful pilot program, SmartRide transitioned to production and now includes components such as an end-user portal for coaching and feedback, solution for data collection, transmission, and analysis, as well as dedicated account management.

2. The Co-Operators

The UBI program launched by The Co-Operators shows that insurance telematics can offer companies a lasting competitive advantage. The insurer implemented a telematics solution to use data at different points of their value chain. For example, in interactions with clients, the company was able to enhance the claims management process and offer users extra services with the help of collected data (like roadside assistance). The carrier also provides a mobile experience for customers in the form of an application where they can see their end of trip scores and receive behavior-specific coaching.

3. New York Central Mutual Fire Insurance Company (NYCM)

NYCM introduced an innovative UBI program called inControl™ to leverage telematics for their business. Teenage drivers and parents can use inControl to get email or text alerts to monitor harsh braking or acceleration, speeding, unauthorized driving times, and unapproved driving locations.

The solution also features a teenage driver coaching functionality. Drivers get access to real-time information about their driving habits through a web portal. By enrolling in the program, eligible drivers receive a 10% participation discount on their premium for the first twelve months. Policyholders can save up to 30% on their renewal premium based on their driving behavior analyzed by the solution.

The takeaway

Telematics is a technology that supports not just pricing, but also claim management and payment, helping insurers to develop personalized offers and nurture customer relationships.

Insurance carriers that execute a unique UBI strategy with the help of this technology can create powerful assets and competitive advantages out of the telematics data collected. I'm curious to see how telematics will shape the insurance industry and generate new practices in the field within the next few years.

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Mateusz Hapon

Machine Learning and Analytics practitioner
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