Your car could soon be spying on you, and it may actually be a good thing! As auto insurance companies deploy telematics to assess driver risk profiles and calculate premiums on the go, disciplined drivers can now stop paying for the errors of other people in their respective age or gender groups.
Auto insurance companies have long relied on factors such as the age of the driver and credit-based insurance scores to decide premiums as actual driving behavior data was not available. This also meant that changes in driving patterns and lifestyle took longer to reflect in the premiums levied. Telematics has changed this equation by letting insurance companies measure driving behavior on the fly and improve the pricing accuracy. As a case in point, insurer Allstate has recently started a crowdsourcing effort to test its usage-based insurance project.
Telematics refers to the technology of sending, receiving and storing information from and to road vehicles. These systems, about the size of a mobile phone, fit under the dashboard of vehicles and use GPS technology. They monitor and transmit to insurance companies information such as the speed of the vehicle as against the speed limit of the road it is travelling on, the driver's cornering, braking and accelerating habits, the time and date, and road conditions, etc. Insurance companies can use this information to assess a particular driver's behavior on the road and fix insurance premiums as well as predict likely claims.
This technology also helps insurers correct anomalies in risk classifications, increase pricing accuracy and sophistication, attract favorable risks, improve profitability, fight fraudulent claims, reduce claim costs, enable lower premiums, and create brand differentiation.
For consumers, usage-based insurance leads to lower premiums, and they can enjoy value-added services such as teen-driver monitoring, emergency services, navigation and infotainment, stolen vehicle recovery and vehicle diagnostics. Besides, drivers can use it to demonstrate safe driving habits to insurance companies following an accident.
Conversely, customers who drive excessive miles or at high speeds will be asked to pay higher premiums or surcharges.
However, before widespread adoption takes place, insurers need to make sure that the long-term benefits of the usage of telematics must exceed its costs and that there are clear benefits for policy holders. Second, there should be clear plans on how to manage the data generated by the systems. A third key challenge would be regarding consumer concerns about privacy, mainly pertaining to driving behavior and location data.
While the shift to telematics-aided usage-based insurance pricing is inevitable, the pace of adoption will be determined by how these challenges are addressed.