By Cherry Chan, Partner, Barnett Waddingham
Telematics insurance is swiftly revolutionising the motor insurance industry. The car insurance sector has rarely changed since Direct Line began selling insurance directly to customers in 1985 to eliminate broker fees. This is why so much attention has been drawn to this new product that is driving the evolution of the market. Currently only 4% of UK drivers have a telematics insurance policy but this is predicted to rise extensively.
The popularity of telematics has certainly increased, with the number of live policies rising from 180,000 in 2012 to 296,000 in 2013. Forecasts for 2014 suggest that the rise of new smartphone application technology will spur the growth even further.
Telematics products are aimed at drivers of all ages and not, as if often perceived, solely young drivers. As new telematics policies emerge with different distinguishing features, drivers can now select those that are suited to them as well as reducing their insurance expenses. Four current innovative telematics policies which comprise of distinguishing factors are Carrot Insurance, Insure The Box, Citroen and More Than.
Carrot Insurance offer an incentive based policy that can benefit young, low mileage drivers. Each policyholder is given a prepaid Carrot Card MasterCard at the start of their policy. A small telematics device is fitted in the car, which records different aspects of the driver’s ability in order to evaluate the type of driver that the individual is. Each quarter, if the driver improves on their driving style, they are rewarded with cash payments onto their Carrot Card.
Similarly, Insure The Box offer an incentive based policy, in which individuals who often shop online can benefit, as well as safe, low mileage drivers. The policyholder only pays for the mileage that they expect to use in a year, and choose from a range of 3,000 and 7,000 miles. The driver can increase their miles by earning Bonus Miles for safe driving, as measured by the telematics black box. Up to 100 Bonus Miles can be earned each month, and any miles that are not used can be rolled over to help offset the cost of the next year’s premium.
Telematics insurance is also available to more experienced drivers. Citroen currently offering free insurance for the first year of ownership of the C1 Connexion to drivers aged 21 or over and who have at least 2 years’ No Claims Discount. The C1 Connexion is the first type of car to have an insurance black box fitted as standard. The driving data recorded by this telematics technology allows insurance companies to analyse the driving style and alter future insurance premiums accordingly. A fortnightly score is taken from 0 - 500, measuring the driving performance. Drivers who score greater than 475 will be issued a warning, and the accumulation of 4 warnings will result in policy cancellation.
Most recently, insurer More Than launched a telematics app that offered drivers up to 20% off their motor premiums. Drivers receive a discount once the app has collected 200 miles worth of data on acceleration, braking and speed. On the completion of each journey, feedback is provided to the driver on how to become safer.
Challenges for Insurers
One of the key challenges that currently exist within the industry is the portability and confidentiality of data. Currently the only party with access to telemetry data is the holding insurer. If customers are to change insurance providers, they are going to want to be able to transfer their built up telematics history to their new insurer in order to prove that they are safe drivers. Similarly, insurers are going to want proof of the driving ability of new customers to identify if the drivers are dangerous or not. However, insurers are not legally allowed to reveal the basis of their premiums, this includes sharing of telematics scores. Discussions and debates are still being held between the government and insurers regarding the rights surrounding telematics data.
Another challenge is that surprisingly many drivers, in particular those between 18 and 24, are reluctant to use a black box. They oppose the use of ‘big brother’ technology and don’t like the idea of their driving traits being constantly monitored and recorded. A recent survey found that 58% of 18-24 year olds were unwilling to use a telematics device, even if it meant that their car insurance premiums would fall . Questions do still exist as to whether the telematics market will take off as a result of market developments. At present, telematics accounts for only 1% of the car insurance market.
The future for telematics insurance is seems bright as a result of the market developments discussed above. Policy features are certainly becoming more and more innovative and attractive alternatives to traditional motor insurance policies, however, in the face of some distinct challenges, only time will tell if telematics can take over traditional motor insurance.
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