The notion of a vehicle with a mind of its own has popped up from time to time in popular culture. Remember the situation comedy back in the 1960s about a woman who is reincarnated as her son’s car, speaking to him over the radio in the dashboard? How about the high-tech TV crime fighter in the 1980s whose “partner” was a highly sophisticated automobile that wasn’t shy about speaking up, armed as it was with some impressive artificial intelligence?
Well, intelligent vehicles are no longer merely fodder for TV scriptwriters now that computer chips rank right up there with brakes and spark plugs as crucial parts for most cars and trucks.
Thanks to voice activation functions, the idea of talking to one’s car or truck has long since gone from TV fantasy to commonplace reality. Most are so comfortable with the technology that it has become second nature to their driving experience.
Of course, a car or truck equipped with a telematics system can “talk” with others besides the driver, including the vehicle’s insurer. Carriers can monitor where (rural versus urban), when (busy rush hour versus quieter periods), and on what kinds of roads (highways versus city streets) an insured vehicle is driven. They can check on how often the vehicle is on the road, how fast it’s going, as well as how carefully it’s being driven—whether hard braking, rapid acceleration, or quick turns are the norm rather than the exception, for example.
This has tremendous implications for auto insurance underwriters. Rather than making educated guesses about a driver’s risk based on traditional factors, such as age, gender, miles driven, accident history, or even the more controversial correlation with credit scores, insurers can make pricing judgments based on harder data and focus on indicators with a much clearer connection to actual incidents.
However, it’s important to keep in mind that, while the adoption of telematics presents underwriters with some dream statistics to slice, dice, and crunch for their pricing decisions, claims managers can leverage the same technology to improve their outcomes, both in terms of running an incident investigation as well as preventing losses from happening in the first place.
Indeed, this technology has the potential to revolutionize auto insurance claims management by shifting many of the responsibilities and burdens associated with an accident from the insured to the carrier, while providing insurers with very useful data to more effectively investigate losses and deter frauds.
Should an accident occur, vehicles can automatically notify both the authorities and the insurer. This beats having to wait for the policyholder to file the first notice of a loss—especially if the insured or others involved in an accident are injured and require medical care.
The carrier or its telematics vendor can contact the insured right after an accident, assess the situation in real time, and dispatch emergency services. A call to a preferred towing firm can be prompted, with the damaged vehicle taken to an authorized repair facility. And if a car is stolen, the telematics device can be used to identify its location for the authorities.
The use of electronic data recorders could be very helpful in asserting liability (in terms of comparative or contributory negligence, for example), as well as in making subrogation claims and countering those of other carriers.
Indeed, claims investigations take on a whole new dimension, with telematic data helping to reconstruct an accident and verify (or undermine) the testimony of those involved or who witnessed the event. A simple check of the vehicle’s speed, velocity upon impact, braking history, and other factors could establish that an accident would not likely have occurred, or reported injuries been sustained, under the specific driving conditions recorded.
The data captured will likely deepen the pool of information available for predictive analytic systems, bolstering the capabilities of underwriters and fraud investigators alike.
Telematic technology could help insurers avoid risk in the first place in a variety of ways. The vehicle’s talking global positioning system can coach drivers while they are at the wheel, advising them to slow down or take more care with turns or offering other suggestions based on the way they are driving as well as the road conditions they face. As an added value, telematics can monitor the road behavior of teenage drivers and report regularly to their policyholder parents.
Telematics should theoretically help identify the best drivers in an insurer’s book of business. Prime customers could be retained with premium discounts that pay for themselves because such insureds are less likely to file a claim. And the mere presence of an electronic monitor might prompt less accomplished drivers to handle their vehicles more carefully, thereby lowering the frequency and severity of claims.
On the flip side, the technology should raise red flags about less skilled or even reckless drivers, whose coverage could be priced to more accurately reflect their higher risk—or simply not be renewed.
But what about those who opt not to install telematic devices? Is that choice in itself cause for concern about their driving ability? Should they be hit with a surcharge for opting out, even if their objection to telematics is philosophical—say, based on personal privacy issues—rather than having anything to do with their driving ability?
For claims managers and underwriters, a major question is whether the majority of insureds will accept having their “big brother” insurer as a virtual backseat driver. Research by Deloitte sheds some light on this conundrum.
A Deloitte Research survey of 1,080 auto policyholders in the summer of 2011 found that, while 30 percent of respondents flat out would not agree to install a telematics device under any circumstances, another 30 percent would agree without preconditions. The other 40 percent said their answer would depend on the premium discount being offered.
Nearly half of this price-conscious segment said they would expect more than a 20 percent discount to make telematic monitoring worth their while. About one in five would want a price break of 16 percent to 20 percent, with a similar number expecting a potential discount of 11 percent to 15 percent. Just one in 10 would go along for a 6 percent to 10 percent discount, while only a handful (2 percent) would agree for less than 6 percent in savings.
Interestingly, while the two younger respondent groups surveyed (those aged 18-25 and 26-34) were far more enthusiastic than were those over 35 about other technological advances in auto insurance—such as the usefulness of Web-based services, mobile applications and social media—when it came to telematics, it was the older respondent segments who would be more likely to agree to have a monitoring device installed. Apparently, the more experienced the driver, the more comfortable they are having their road skills recorded.
But even if widespread policyholder acceptance is somehow secured, there are likely to be other bumps along the road for claims managers to carefully consider when implementing telematics.
For one, an insurer cannot implement a telematics-based system overnight. The technical integration and procedures required to coordinate telematics from individual vehicles within data warehouses and claims systems so they can be leveraged for investigative purposes will require state-of-the-art tech architecture and infrastructure. Claims managers will have to rethink their standard operating procedures and retrain their adjusters to incorporate telematics into their routine.
It also remains to be seen how telematics will impact auto accident litigation. Might some policyholders balk if insurers require them to sign off on releasing telematic data to the authorities, whether it’s the police investigating an accident or in response to a subpoena involving an accident-related lawsuit? And regardless of what policyholders want, states might have their own rules on the subject, which makes it incumbent upon the claims handler to pay special attention to the relevant statutes and regulations.
Down the road, might telematics be challenged by state regulators if the pricing system that results is found to have a disparate impact on a particular economic or demographic segment? In the meantime, federal regulations were due to be implemented on Oct. 1 by the National Highway Traffic Safety Administration for cars equipped with electronic data recorders—so-called “black boxes”—setting standards for data collection. (For the moment, however, the federal government will not require cars to have such devices.)
These are all legitimate concerns, but at first blush telematics appears to offer far more positive benefits than potentially negative drawbacks for insurers and good drivers alike.
With the technology getting less expensive, more vehicles being equipped with these capabilities, and drivers becoming more accustomed to electronic monitoring, widespread use of telematics may be inevitable. If that’s indeed the case, the challenge becomes determining how claims managers can employ telematics to create a differentiated customer experience while establishing a competitive advantage.
Any “smart” car could tell you that!
Sam Friedman is insurance research leader with Deloitte’s Center for Financial Services in New York. He has been a CLM Fellow since 2011 and can be reached at samfriedman@deloitte.com.