For years, telematics technology—in-car recording and communications systems that collect data and provide navigational and emergency systems to drivers—has been offered up as a modernizing solution to the auto insurance industry, but it has been slow to catch on.
There are several reasons for this. First, consumers, protective of their privacy, have been slow to embrace technology that they believe may follow their every movement. Second, car manufacturers have resisted installing additional expensive components without a market ready to pay for them and without any other appreciable benefit to sales. Third, insurance companies, having conducted frequent trials and launched programs that target only a slice of their potential market, such as teenaged drivers, have been slow to roll out large-scale consumer telematics programs due to execution challenges.
Developments in the field include the increasing use of event data recorders (EDRs) that allow accident data to be manually harvested as well as telematics technology, which transmits the event and driving behavior data from the vehicle via cellular communication in new passenger vehicles. EDRs are not required by law, but if manufacturers choose to equip their new vehicles with them (as many have), the devices must meet uniform federal requirements. Pending federal legislation, if enacted, would mandate EDRs on all new passenger vehicles by 2015. In addition, though progress has been slow to date, the cost of EDRs and telematics devices has started to come down, and research suggests that by 2016, 84.6% of all new cars will have telematics devices installed. Maximizing the value of that technology while ensuring consumer privacy will be one of the upcoming challenges facing the industry.
Gauging Consumer Receptivity
Without a legal mandate for EDRs, auto insurers may find their use pretty limited and data often unavailable for accident assessment. Answers to a recent LexisNexis survey indicate inconsistent consumer receptivity and some resistance to recording driving behaviors. The study consisted of a Web-based survey of a representative sample of insured drivers as well as adults who have a 16- to 25-year-old dependent on their policy.
Fifty-seven percent of respondents thought that actual driving data should be used to determine rates, but they also felt that many elements of this behavioral data, such as time of day and type of driving, should not be used. When asked about specific driving habits, a majority of policyholders rated high-risk behavior, such as abrupt stopping and driving 10 miles over the speed limit on a street, as factors that should impact policy rates.
The survey results also showed that a comparable number, 57%, of policyholders are comfortable sharing with insurance companies information about events that lead to traffic accidents—a much higher response than the 29% who indicated they were comfortable with social networking sites storing personal information, such as messages and photos posted on websites.
If the majority of consumers are OK with sharing some information on driving behaviors with their insurers, why, then, isn't the use of event data recorders or telematics devices more popular? When survey participants were presented with the framework of a potential telematics-based insurance program and asked what they disliked about it, they most commonly identified privacy concerns. When the insurance program was presented to them as something that provides them with more control over their insurance policy, respondents became slightly less concerned about privacy; however, it was still the most significant barrier.
Policyholders were very receptive to telematics-based programs when presented with tangible benefits. Eighty percent would favor a program that provided them with information on how their child is driving, and 79% would favor a program that let them choose the type of data used. Seventy-six percent would favor a program that would reduce their premiums, and 80% thought the program would be more appealing if they could opt out in the event that it does not reduce their premium.
Finally, respondents were asked whether or not they were aware of devices such as EDRs and on-board telemetry devices. Only a small minority of respondents claimed familiarity.
Even though there is very little reported awareness about telematics, there are pockets of receptivity to those that influence premiums based on actual driving behaviors. Policyholders are willing to entertain programs that promise some sort of financial benefit, but they want the power to opt out and control the amount of information being shared. Despite the potential benefits from the use of driving data in accident investigations, currently only a subset of policyholders could be seen as being willing to use a telematics device.
If the industry truly sees value in examining recorded behavioral data, consumers will most likely benefit from more aggressive policy pricing and more accurate claims evaluations. In addition, telematics could mean more compilation, benchmarking, storage and analysis of data than insurers currently do or plan on doing. There is a significant leap from using crash data on a single claim, or even on a series of claims, and reviewing behavioral patterns over the long term to establish rates. While telematics still faces some hurdles, it can provide significant insight when used as one of several data assets to evaluate risk.
Bill Madison is vice president and general manager of LexisNexis Insurance Data Solutions.