Insurance telematics challenges for new entrants

Insurance Telematics – Challenges for New Entrants May 2014 BLOG POST

Telematics has its own set of challenges for new entrants Progressive came up with the first Usage-Based Insurance (UBI) product way back in 1998 and offered mileage-based discounts through the GPS technology and cellular systems, which tracked miles driven. Pay As You Drive (PAYD) policies grew rapidly, particularly among the drivers whose vehicle usage was often very different than that of standard drivers. Since then, technology has evolved and several variations of UBI like Pay How You Drive (PHYD) and Manage How You Drive (MHYD) have come to the market.

UBI programs have typically relied upon proprietary devices installed in each vehicle, an investment only large carriers could afford. But now companies like Driveway Software are making an entry into the UBI space and setting the stage for small- and mid-sized insurers to compete with innovative UBI offerings with mobile device applications.

A lot of companies have introduced telematics-based solutions for insurance programs, but there is still a large chunk of insurers who are still keeping themselves away from the wave. To take the telematics path, they need to overcome certain challenges.

First and foremost of the concern of a late entrant is to develop expertise in data gathering and analysis and to introduce its own device like Progressive has done. All these things require investment in technology and resources to start with. Independent telematics providers can come to rescue of these insurers, by providing expertise through their long-term experience in product development and data gathering. These external experts can certainly help telematicsbased insurance aspirants to overcome the most important challenge and help them withstand competition from already present strong, large competitors.

Insurers can collect lot of data regarding driver’s location, behavior, etc. through a telematics device, which raises privacy concerns, the second important point in developing an insurance model based on telematics. However, today information sharing through social media is growing among consumers, aided by increasing penetration of smartphones and the Internet of Things.

Another important issue hindering telematics usage by new entrants is of margins and profitability. Insurers reward good drivers in terms of premium discount. Such programs are still in their nascent stage, and there is a lot of uncertainty regarding the data gathered about a driver’s behavior, its meaningful analysis and ultimate discount given based on all this information. Companies are still skeptical in relating the behavioral aspect of consumers, discount given and pricing structure of car insurance.

Insurance Telematics – Challenges for New Entrants

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Insurers who are interested in developing telematics programs need to understand that they have to think and focus more on customer acquisition and not on profit or margins in the beginning.

Going ahead, discounts cannot be the only attraction to retain customers One important aspect which insurers have to start thinking about right now is that going ahead, mere discounts would not be able to bring and increase loyalty among customers. Once telematics-based insurance becomes standardized, companies like Progressive and State Farm – the early birds to take advantage of telematics solutions which increased their customer base based on discounts – have to think beyond discounts in order to retain their customers.

Companies can differentiate themselves by providing value-added services like coaching young drivers, infotainment services, vehicle diagnostics and fleet management to name a few.

UBI is poised for mass uptake in the US market. In the US, the number of vehicles insured under UBI policies was just around 1 Mn in 2012, which grew to around 2.5 Mn in 2013 and is expected to reach around 5 Mn by the end of 2014. Technology advancements are definitely going to make it more affordable, easy and more effective in coming days. Hence, insurers who take initiatives in terms of differentiating their telematics offerings are likely to gain in the long run.

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