Telematics is an emerging technology, set to change the way insurers currently underwrite new business.
It enables the car insurance policyholder to benefit from cheaper motor insurance premiums through four simple steps. In the first instance, the insurer installs a telematics device in the policyholder’s car, which tracks the driving skills of the policyholder depending on their car usage. Thereafter, data gathered is analysed on a frequent basis, and finally, good drivers are charged a lower premium.
Traditionally, motor insurers used to set premiums based on the data related to the driver, which included the demographics of the driver, claims history, and up to some years ago on gender – although this is now no longer permitted due to the 2012 EU Gender Directive. Moreover, information on the type of car being driven – such as the model, power and speed – was also required to set motor insurance premiums.
Vehicles are equipped with GPS (Global Positioning System) technology which tracks their whereabouts and, in addition, the information recorded by the built-in GSM (Global System for Mobile communication) technology is sent directly to the insurer. The data collected includes driving speed, total mileage driven, distance travelled, location of the car, type of roads travelled, braking and accelerating patterns, and the time of day when the vehicle was used.
More recently, instead of the traditional installation of physical devices, this process can now be done through mobile phone applications which are much easier to download and install.
Telematics car insurance was introduced because policyholders felt that they were being unfairly charged for their motor insurance policies due to the demographic segments they fell under. For instance, young drivers were charged higher premiums because they were deemed to be reckless and therefore presented big insurance risks – although there are some exceptions to the rule.
Therefore, the main benefit of telematics car insurance is that the motor insurance premium is lower for those drivers who show that they are safer on the road than others. Rather than relying on statistics based on past trends, premium pricing allows for more individualisation and precision. Moreover, as data is made available through online portals, policyholders can monitor their own driving performance and, in that way, control their motor insurance premiums.
An advantage for insurers is that telematics enable them to accurately assess and quantify accident damages and therefore help to reduce the number of fraudulent claims. The telematics box will register crucial data about a car accident such as the direction, speed, vehicle position and even the angle of vehicle collision – which will help determine whose party is at fault. This is also advantageous from the policyholder’s perspective, as claims will be settled more easily and fairly.
Privacy issues relating to the use of personal data still remains one of the top concerns
The telematics device also helps to achieve more road safety. Policyholders can be alerted when they brake too hard or drive too fast, therefore prompting them to tame their driving. Also, people may be encouraged to drive more carefully because they are being monitored. UK insurance industry statistics show that there is a 40 per cent decrease in the risk of accidents when a new driver has a telematics policy.
In spite of all these benefits, privacy issues relating to the use of personal data still remains one of the top concerns. Insurers are able to track the policyholders and gather information they may deem as sensitive, such as their location at any point in time. What would insurers do with this data? Share it with third parties? However, aren’t most of us already willingly and, at times unknowingly, sharing personal data online? Therefore, are policyholders generally against the use of telematics due to privacy issues or because they are afraid of what it can and will record?
The Maltese motor insurance market has seen two telematics-based policies introduced. These policies take the form of PAYG (Pay-As-You-Go) which is based on mileage and PHYD (Pay-How-You-Drive), which is based on behaviour. Both policies are targeted at young people between the ages of 18 and 30. Abroad telematics insurance has been popular not only with the younger cohort but also with older segments of the population. Therefore, introducing these policies to other segments might prove to be beneficial and feasible both for insurers and policyholders alike. In March 2016, the British Insurance Brokers’ Association (BIBA) said that telematics policies can offer savings of up to 25 per cent in motor insurance premiums, especially for young drivers.
It is important to note that the use of telematics is only in its early stages in Malta and thus one cannot yet accurately measure its success (or failure).
The fast pace of technological advancement, including the phenomenon of driverless cars, is helping the growth of telematics car insurance. Technology is helping to improve both the effectiveness and costs associated with the devices. It is only through telematics that insurers can gather better driving data to be able to price insurance precisely for each individual, according to the risks presented.
Ranjini Paramalingam is an associate director and Katia Farrugia is an advisory assistant in Insurance Advisory Services at KPMG Malta.