Time to shift gear on insuring drivers and cars by use of telematics

Careful drivers could be in for some welcome news thanks to new technologies which will make it easier for insurance companies to reward them for their good behaviour. Motor insurance is a product which has changed little over the years but things could be about to change, according to KPMG head of actuarial services Brian Morrissey.

“If you were to stop 100 people on the street and ask them to name two types of motor insurance most would mention third party, fire and theft; and comprehensive”, he points out. “Both of these standard products have been around for many decades, and virtually all insurers offer them. But, by using the latest available technology, insurance companies have begun targeting safer drivers with far greater precision.”

The attraction for the insurance companies is obvious – safer drivers mean fewer claims. "As discerning customers will have noted, insurance companies are looking to attract lower-risk customers and are beginning to recognise the need to introduce new pricing structures that enable them to offer lower premiums to safer drivers", Morrissey says. "Companies such as FBD Insurance, under its 'No Nonsense Insurance' brand, and AIG are now offering new products which take more account of driver behaviour."

The problem for the industry has been the identification of safer drivers – before they accumulate seven years without a claim. One approach was to look at a class of driver such as women with a good claims record and reward all of them. However, offering lower premiums to women on gender grounds was outlawed under equality legislation. This is where the technology steps in.

Telematics is a set of communications technologies used in a wide variety of fields but probably best-known for its application in vehicles and with control of vehicles on the move. It has been around for a very long time in the heavy goods vehicle sector where the so-called “spy in the cab” tachograph records distances covered, speed of driving, and continuous hours driven among other measurements to ensure drivers comply with health and safety requirements.

Rating by telematics

The same technology is now being introduced into private cars to sort out the good from the bad drivers. In an industry not usually known for innovation, motor insurers are offering new products using telematics to reward drivers for good behaviour.

“Using smart devices installed in the vehicle, the insurer monitors driver behaviour such as cornering, braking, acceleration, the time of day the car is driven and so on,” Morrissey explains. “Safer drivers are rewarded with lower insurance premiums, while riskier drivers pay a higher price.”

Irish insurance company FBD has included a telematics offering with its No Nonsense product since 2012. Under the SmartDriver option, drivers under 30 who agree to install a telematics device in their car get an immediate 10 per cent discount. The device stays for six months and, if their driving is good enough over that period, they can qualify for a further discount of up to 20 per cent, giving an overall potential reduction of 30 per cent.

“The driver can access their driving information through an online portal”, says Jackie McMahon, who leads FBD’s telematics offering.

“It puts the driver in full control by giving them information to improve their driving and to save money on their insurance premium. It’s much fairer because it rates you based on your driving behaviour and rewards safer drivers. SmartDriver is aimed at drivers under 30, giving them the opportunity to get insurance at prices usually only available to older drivers.”

“Basing the premium for one customer on the claims history of the wider population for has always been an unsatisfactory and inexact science,” says Morrissey. “Telematics, using both claims and more relevant driver data, can change the pricing of insurance from homogeneous customer groups to individualisation with scope for better and fairer pricing.”

It may not be all good news for customers and insurers, however. Some drivers considering “smart insurance” will have concerns. Among these, a key issue is how well the idea of Big Brother-style surveillance will sit with drivers. Just how comfortable will drivers be, knowing their insurance company can track where they are? Furthermore, whether more experienced drivers have an appetite for their driving habits being scrutinised is less certain; how would a driver with 20 years’ experience feel if told their driving does not meet the required standard?

For insurers, challenges also exist. “The cost of the in-car technology and the monitoring of the data received remains expensive relative to premium volumes,” Morrissey notes. “This may explain why some insurers are monitoring developments in the telematics area and have not yet decided to invest and launch products.”

However, these challenges may lessen. “In the era of mobile apps for so many everyday issues, concerns around privacy matter less to the millennial tech-savvy generation who are more open-minded about IT innovation. For many young drivers any premium savings will outweigh the inconvenience of constant surveillance and scrutiny.”

It makes sense then the first products target younger drivers, who embrace the use of technology. Whether insurance companies see scope for growth beyond this market remains to be seen. Morrissey is not surprised these products are emerging with a focus on young drivers. “The combination of advances in technology and a young driver market that embraces technology make this an attractive proposition for both insurers and consumers.”

Driver discipline

Morrissey believes parents wishing to encourage discipline in their son or daughter’s driving are a future target market as are those doing city driving in the family’s second car who may also benefit from data that records slow speeds in heavy traffic. In addition, the technology is already being used in other countries to assess fault in accidents, often reducing the cost of claims. Moreover, value-added services such as rapid response to claims or immediate breakdown assistance are potential add-ons as the market develops.

"Many business sectors have had to come to terms with innovative use of technology which has changed the way we purchase products," Morrissey says. "For example, online shopping giants such as Amazon, Asos and Net-a-Porter have replaced some bricks-and-mortar retailers. Now the motor insurance landscape is seeing the prospect of major change through innovation but only time will tell how much consumers like and want telematics-based insurance."