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9 March 2012

Telematics-based insurance systems: poised for expansion?

Want to reduce your vehicle insurance premiums? A telematics system could be the solution, says Sharon Clancy, allowing insurers to make much more accurate predictions about risk

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You operate a fleet of vans. You’ve heard on the news that insurance premiums are going up so, when it’s policy-renewal time, you’re braced for a premium increase; but you’re hoping that it will be balanced by your not having made any claims.

Then you’re shocked to find the premium has doubled. That’s a sizeable addition to your operating costs – and a lot more than you were expecting. Unfortunately this is a increasingly common experience for fleet operators.

Insurers blame various factors for this general hike in premiums – an increase in injury claims; fraudulent claims; the rising cost of vehicle repairs; and legal fees. There are reports that some insurers are reluctant even to quote for perceived high-risk vehicles and drivers. That could mean a young person, or a driver such as a courier operating in a high-risk environment –an urban area at peak travel times, for example, or somewhere where minor knocks are a hazard of the job.

Female drivers are also facing higher premiums at the end of 2012. From then on, insurers will no longer be able to use gender to calculate risk, following an EU ruling that it is discriminatory. Their own claims statistics might tell them that female drivers have fewer accidents and that when claims are made, they are less costly, but that data is non-admissible now, and they will have to find a gender-neutral method of identifying high-risk drivers.

Telematics – a timely solution

With insurers, drivers and fleet operators all looking at ways to mitigate premium increases, the era of telematics-based insurance looks set to enter a fast-growth period.

Pay-as-you-drive insurance products have been around for some years, of course. In the past they were aimed primarily at young drivers. But historically there have been limits on what data capture and processing was practicable, and these have led insurers to proceed cautiously.

Aviva, for example, abandoned its first foray into the telematics-based insurance sector in 2009, despite achieving a 27 per cut in premiums and a reduction in accident rates of a third. It cited high overheads as one of the reasons (although it is now re-entered the market – see panel).

Technology and back-end systems can provide the granularity of data required, and can deliver it in formats that are usable by insurers. Much of the anticipated growth is expected to derive from private motorists, but fleet operators stand to benefit too. The telematics companies we spoke who are providing some of the hardware believe it is a logical step for insurers to offer similar products to them.

"It is certain that the use of telematics data in insurance risk assessment will migrate to the fleet sector," says Andy Walters, managing director of Quartix, which has supplied telematics boxes for pay-as-you-drive insurance specialist Coverbox.

"The carrot of lower insurance premiums will also help make telematics more attractive to a wider number of fleet operators." Some fleet managers are already using telematics systems to modify driver behaviour, he points out. "It’s a relatively small step from there to share information with insurers to reduce premiums." 

Aviva re-launches telematics-based insurance

Aviva, the first company to launch a fleet telematics insurance policy seven years ago, is now back in the market. While other insurers have focused on supplying a nominated telematics black box as part of the package, Aviva is prepared to accept data from third-party telematics suppliers.

The telematics units must meet a number of criteria, including maximum speed notification when a vehicle exceeds 70mph; the ability to record abnormal acceleration, braking and cornering, as well as the duration and distance of each journey; and the ability to identify both the vehicle and the driver.

"Businesses have invested much more heavily in vehicle telematics in recent years," explains Mark Keavney, development manager – commercial product, "and our approach enables customers who already have the technology installed to maximise the insurance benefits when buying cover for their fleet.

"We recognise that the cost of running fleets is increasing, so we are providing a cost-effective way to reward customers for making a commitment to risk management through using telematics to capture and analyse data on their drivers’ behaviour behind the wheel.

The Aviva telematics cover is available on Aviva’s Fleetwise products, for fleets where at least half of the vehicles have telematics technology installed. Aviva’s fleet risk advisors will work with customers to help them monitor their own data and make changes to their driving as appropriate.

Fleet operators adopting telematics-based insurance will get other benefits, points out Martin Otter, insurance manager for Trimble, which is a global telematics provider for insurers Zurich, and now also Equity Red Star.

"Insurers will take the data they want, but fleets will get associated benefits such as real-time tracking and lower fuel consumption from improved driving techniques. Insurers will want evidence that operators are looking at the data and trying to reduce the risk, and they are likely to be proactive in interpreting the data and, where appropriate, offering advice."

Otter also predicts that van fleet operators in will start actively wanting telematics-based insurance. "Some operators are taking our Driver Safety product, but are currently getting no fiscal recognition of their efforts to reduce accidents."

Telematics-based insurance can be a win-win situation, agrees Walters. "Insurers get an abundance of data the enables them to price-risk more effectively, while customers get a premium that truly reflects their risk profile."

Insurers are also interested in the potential of telematics-based systems to manage claims, says Paul Whiskin, senior consultant at claims management specialist IT-Freedom.

"The obvious benefit is confirming vehicle location, but with the huge rise in hard-to-verify whiplash injury claims, insurers are also interested in collecting data that would enable them to predict statistically, for example, that if an impact occurred at less than 2g or less than 15 mph, the likelihood of serious injury is greatly reduced."

Telematics systems are good at capturing driver identification details, a key aspect for any insurance claim, says Whiskin. "Fleet drivers often don’t report an accident, but the company is still liable if there is a third-party claim. You need evidence of where the vehicle was and who was driving it."

Towergate’s telematics-based truck insurance scheme

Insurance policies for truck fleets that guarantee a premium reduction in return for more proactive management of risk by operators have been developed by the commercial motor division of independently-owned insurance broker Towergate Insurance.

Towergate’s new policies are designed for fleets operating trucks over 7.5 tonnes gross – a speciality of the commercial motor division. Trucks must have an approved telematics black box fitted, and operators have to commit to a two-year contract (with the option to extend to three years). Over that time, Towergate guarantees premiums will be reduced, so long as claims drop below a pre-agreed level.

The telematics black box is key, says Larry Smith, managing director of Towergate’s commercial motor division. "Operators understand there is a direct relationship between claims history and premiums, but whereas claims experience looks backwards and tells us about past risk, telematics look forward and can help identify current risk.

"Higher accident rates, for example, may not necessarily be down to individual drivers, but could be route-related or an issue with certain vehicle profiles in the fleet. Telematics help identify the risk points."

Operators must have the desire to reduce their risk and be proactive in managing it in order to benefit from the policy, says Smith. "We expect operators to manage identified risk in the business." In return, Towergate is prepared to put in extra resources to help them identify areas where risk can be minimised. Towergate already has a 60-strong team of CPC-approved HGV driver trainers to help companies address any skills shortages, for example.

Operators will be able to choose from a list of approved telematics boxes, which is currently being compiled. "We have a technical approval process that suppliers must undergo to demonstrate their box meets our specification criteria. We don’t want to compel operators to switch telematics supplier, but we do need to ensure that the black boxes will deliver the data required."

Later this year, says Smith, Towergate will unveil a telematics-based insurance product for vans.

He points out that fleets are not immune to falling victim to insurance scams such as staged accidents. "Telematics can give you evidence to refute false claims and keep you one step ahead of the fraud community."

The latest telematics company to enter this market is TomTom, whose Fair Pay Insurance scheme was announced just as we were closing for press with this article. The system has been created in association with Motaquote, a leading insurance, and has its own managing director, Nigel Lombard.

"This is unlike some other telematics-based schemes, where you may have to prove your ability over a number of months," he says, explaining that good drivers can expect to see benefits up-front. (More details in News Update, page xx)

How it works

The on-board telematics black boxes themselves and the related back-end systems are both important in delivering a trusted and reliable product. Cobra, Quartix and Trimble have been key suppliers of the black boxes to date, and all use their own designs, but industry experts say that insurers are close to agreeing a standard for telematics boxes via their professional body, the Association of British Insurers.

The standard is expected to cover both the behavioural data that will be captured and the granularity, and there will be a separate standard for incident-recording data – including its frequency and latency.

However, Paul Stacy, IT Innovations director for Wunelli, says insurers are mindful not to create a standard that the telematics suppliers would struggle to meet. "Customers of Admiral, Coverbox and the Co-Operative Society can already use the same telematics box, and as we add more insurers during the year, they will also be interchangeable. The insurers want to differentiate their product, not the technology."

For the insurers, the benefits of telematics-based policies start at the point of installation. "Most insurance companies never get to see either the vehicle or the driver that they are insuring," says Walters. "The installation process therefore offers an excellent opportunity to check out a few key facts and documents, helping to prevent the most common forms of vehicle insurance fraud.

"The installer verifies that the vehicle is as described on the application, without significant modification or damage, and that the insured is also the registered keeper of the vehicle. Copies of the driver’s licence and registration documents can be made and transmitted via a mobile application, using either a smartphone or portable computer."

Once the telematics company verifies to the insurer that the unit is installed, data collection starts. For consumers, insurers are using Web portals where drivers can check reports on driving styles. Premiums can reduce in return for good driving behaviour, or customers can earn "rewards" such as vouchers.

Anatomy of an insurance-related telematics black box

Quartix is supplying 1,200 of its fifth-generation TCSV9 telematics black boxes to Coverbox every month. GPS positions are taken every 10 seconds with 1 second resolution, and firmware updates and configuration are automated and done over GPRS – important for the consumer market.

The black box also captures and stores a detailed, rolling, 30-second log of vehicle activity (speed, acceleration, braking), together with direction and location. This data is automatically transmitted to Quartix servers whenever a significant g-force level is sensed (indicating an accident has occurred).

The Quartix box monitors acceleration, braking, cornering and speeding through a combination of GPS data and an integrated tri-axis accelerometer. Speed is monitored against a road-speed limit database for the UK.

There is full communication redundancy, with two GPS PANs and dual-server locations. The latest GPS chipset is said to give accuracy in all areas.

There are serial, digital and analogue inputs, and a one-wire bus for driver identification. There is an alternator voltage sensor for two-wire installation.

Some insurers charge by the mile, with different rates for different times of the day. Trimble’s Martin Otter thinks this price model could have fleet applications. "Total mileage is more relevant for fleet operators than location, as fewer miles reduces risk. Some insurers already offer lower premiums for less mileage, and it’s possible that by changing delivery patterns, operators might be able to reduce risk further – by delivering at night, for example, when there is less congestion."

Capturing the data is just the first step. It then has to be analysed for insurance purposes. "It’s all about the data you collect and how you use it effectively to reduce loss ratios and provide new rating factors," says Paul Stacy of Wunelli. "Validation of the data is crucial."

Wunelli has spent the past three years honing a telematics-based solutions for UK motor insurers. Despite not being an insurer itself, Wunelli developed Coverbox, an online pay-as-you-drive telematics-based insurance product, to prove the concept. As noted above, Quartix is one supplier of the telematics boxes.

"Coverbox was vital in understanding how telematics could be applied in the insurance sector," Stacy says. "It taught us what data to collect, how to validate it and use it for insurance purposes. We’ve worked with industry experts to understand that data and correlate it to actual claims."

Coverbox was sold to DirectDrive last year, and Wunelli now includes several insurers amongst its customers, including Admiral and Co-Operative Insurance.

Driver scoring systems

Telematics-based insurance products use "risk scoring" systems to calculate premiums. The telematics black boxes capture data on driving behaviour and location, and the data is then used to created risk profiles.

Parameters such night time driving and driving in congested traffic are matched to driver behaviours such as excessive speeding, harsh braking and acceleration. Wunelli, for example has developed a Driving DNA Score, a safety index between 0 and 100 where 0 is extremely unsafe driving and 100 is extremely safe driving.

"We have used historic data from roughly 20,000 GPS telematics devices over the last two years, combined with actual claims data to create algorithms to calculate a Driving DNA Score."

Trimble’s Drive Safety in-vehicle telematics box includes what it calls an in-cab "coach" to encourage drivers to modify risky behaviour. "Insurers will increasingly look at driving behaviour before deciding whether to accept a particular risk and at what premium," says Martin Otter.

"Insurers are trying to reduce their own costs by closer identification of the risk, and of which clients pose the greatest risk. Age profiling is no longer sophisticated enough to predict risk, so to reduce their own costs, they need to be smarter at identifying which clients are most likely to claim."

The future

Experts predict that telematics-based insurance could become self-perpetuating. "Fleets operators who don’t go the telematics-based route will find themselves paying higher premiums," predicts Otter.

"Fleet operators and drivers who feel they drive safely and feel unfairly penalised under the current risk-assessment methods are choosing to opt for telematics to lower their premiums. That means that insurance companies are effectively cherry-picking lower-risk customers."

Insurers may eventually start to demand a telematics profile before accepting an insurance proposal, in the same way that they currently demand to see proof of no-claims discount today, thinks Whiskin.

Telematics will enable insurers to identify risky behaviours by fleets or individual drivers more clearly. For example, a driver who regularly drives too fast for the conditions but has not yet had an accident is still more of a risk than a careful driver. Until the advent of telematics, however, the insurer has no way of identifying that particular bad driver prior to an accident.

There will be growing demand for vehicle telematics data to be presented at the time a claim is made, says Whiskin. "Insurers don’t want to avoid paying out on genuine claims, but they do want better metrics so they know what level of claim they are dealing with. 


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