One of the buzzwords that has been floating around motor insurance for a while now is telematics, but is now the time for it to come of age?
The story goes back to the mid-90’s when a few insurers, notably Norwich Union (as it then was) and Direct Line, carried out small scale pilots giving some customers the chance to prove that they were low risk (and should therefore be quoted low premiums) by having their driving monitored by a ‘black-box’ which was fitted to their vehicle and transmitted data on their driving behaviour back to their insurer.
Traditionally insurers had rated on various factors about an individual including their age, gender, where they lived, their vehicle and past claims history. However, a few crucial pieces of information were missing – most notably where, when and how did they actually drive. Everyone intuitively knew that these were important factors but until technology costs fell sufficiently the proxies of age, gender, experience, NCD, postcode etc. were deemed to be sufficiently good to calculate a policy price for the individual.
By the mid to late 90’s, the costs of a black box were down to around £200 which meant that for otherwise high-risk (therefore high premium) business, e.g. young drivers, it became worthwhile for the insurer to offer to fit a box in their car (for free) to try to differentiate between the best and worst drivers in this segment. However, there was a problem in this otherwise cunning plan… at this time, the public were not used to sharing their information and the thought of their every move being watched by an insurance big brother was scary at best and a non-starter at worst. This led to take up from policyholders being low and although some learnings were made, both pilots were closed down with the excuse that the public was not ready for such a proposition.
Five years later, the situation has changed dramatically:
- Many people now happily share pretty much every detail of their lives on Facebook and other social media
- The Gender Directive removed what was a significant differentiating rating factor (especially at young ages)
- The spiralling whiplash epidemic sent motor insurance premiums increasing by double digits each year
- Technology costs drastically reduced making the expense of running these proposition more viable.
As a result, many insurers are now either trialling or using telematics with their policyholders and around 1% of the motor market is now sold using this type of technology.
This article is part of a series where we explore telematics and the history behind it, in the next instalment, we will explain more about what telematics is.
This content was written by Andy Goldby and originally featured in the July issue of Actuarial Post magazine published in 2013.
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