While personal black-box motor insurance seems to have plateaued, its commercial counterpart shows potential

Sensors today are everywhere – in our homes, our streets and on our wrists – and businesses of all shapes and sizes are taking advantage. The dusty old insurance sector, isn’t exactly known for taking the lead in cutting-edge methodologies. In one area, however – that of telematics, a risk assessment model that combines telecommunications and sensor technologies, informatics and computer analytics – it’s been leading the way for a surprising period of time.

As Matteo Carbone, founder and director of global insurance think tank the Connected Insurance Observatory, points out, personal telematics-based motor insurance has already been around for 15 years. It brings benefits for both the insurer and the insured – enabling the former, who would traditionally rely on historical data and client reports, to assess risks much more accurately, thus offer lower premiums to the latter, provided they don’t display reckless or incompetent driving behaviour.

Additionally, technology has vastly improved since telematics emerged on the scene. Today black box insurance – also known as connected car insurance – doesn’t necessarily have to involve devices being mounted on automobiles. Alternative, and often more reliable methods, include smartphone apps an on-board diagnostics (OBDs) – which can be plugged into the car’s OBD port, while some car manufacturers already provide embedded solutions. Moreover, this usage-based insurance market offers opportunities to find the scheme that suits the insured party’s driving habits the best: you can pay as you drive (PAUD), increasingly popular during lockdowns; or pay based on how you drive (PHYD), a favourite with safe drivers.

In the UK, telematics is a big hit among new drivers, especially teenagers and their parents. As one of its users put it, having telematics in your car is “like having a driving instructor still with you”. The device will register how sharp your corners are, how hard you brake, and the smarter ones can even tell when it’s not the policyholder driving the car.

The telematics device or app will also clock whether you hit urban roads or motorways more often, at night or in broad daylight. Its approach to risk is somewhat different from that taken in credit rating, for example. While a blank credit record might be an ideal state from a customer’s perspective, the ideal borrower from the bank’s perspective repeatedly takes out credit to demonstrate their reliability in paying it back.

In contrast, instead of encouraging higher mileage to prove your skills, telematics devices disincentivise driving under sub-optimal circumstances. Some of them even impose curfews, with one teenager complaining how friends took the mickey out of him when he needed to drive back home before 10 pm.

This “nannying” feature of telematics insurance, together with the fact that prohibitive premiums tend to plunge when drivers reach 25, are the factors that might jointly explain the precipitous drop of market penetration to 14 per cent for the 25 to 49 age group.

Alastair Walker, editor of British online magazine Insurance Edge, goes as far as to say that “the hope of mass adoption of telematics for personal motor [insurance] has stalled. Somewhere around 20 per cent of drivers use them, and it has been flat now for several years. But those are generally the lowest-risk drivers. Beyond that, there is no incentive.”

While governments mandating telematics or the spread of advanced driver assistance systems (ADAS), including drowsiness detection, lane departure and forward collision warnings, may prove gamechangers in the personal motor insurance line in the long run. But for a more imminently emerging trend, we might need to look to the commercial branch of telematics insurance.

Is commercial auto insurance ready to take up the baton?

Commercial motor insurance could end up a more likely adopter of telematics than personal, as the use of the technology in fleet management has already paved the way for it. In fact, B2B telematics insurance can also be regarded as an additional use-case for fleet management technology. 

The same devices that monitor the location and movement of commercial vehicles or fleets, track their diagnostics, flag their unauthorised movement or help achieve route and fuel efficiencies, for example, can also be leveraged to monitor driver behaviour and determine risk factors to offer personalised insurance policies. Here, the uptake of the technology is not hindered by trade-offs between personalisation and privacy. The installation of telematics in the vehicle is the choice of the fleet manager, not the driver.

With claim costs rising steadily and distracted driving being the cause of a quarter of fatal accidents, motor insurers have a vested interest in finding ways of changing driving behaviour for the better. Naturally, there are significant differences between personal and commercial telematics solutions, therefore the number of insurers who have the necessary expertise and infrastructure to handle comprehensive commercial solutions is still limited. 

Cross-sectoral partnerships, however, are on the rise. Take, for example, WeFlex – a vehicle leasing business that provides cars to Uber and other ride-hailing services – and its partnership with Zego, a London-based insurtech – the first to get its insurance licence last year. Instead of a one-size-fits-all policy, Zego’s calculation of premiums for WeFlex’s 700-strong fleet is driven by live data as well as the historic behaviour of the fleet’s drivers.

Telematics, in this case, gives WeFlex a bigger and more focused picture of its fleet and its drivers’ behaviour, while Zego has a better understanding of the risks it underwrites. Meanwhile, a decrease in the number of accidents works in both partners’ favour.

Articles on Zego’s expansion and new players entering the telematics fleet insurance market suggest that this line of business has future potential. General Motors (GM), for example, partnered with Italian multinational technology company Octo Telematics four years ago to provide usage-based insurance and fleet management services for its embedded OnStar technology.

Fast forward to November 2020 and you can read news of GM going it alone, as the auto giant jumps back into the insurance business with its OnStar brand. The new service is expected to be rolled out across the US by the end of 2022. Until then, watch out for, says Carbone, “a new IoT insurance wave”.

By Zita Goldman

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