Many economists joke that “Brazil is the country of the future and always will be” as a reflection on all the failed predictions on the take-off of the Brazilian economy. Some may argue that the same quote can be paraphrased and used to describe the long awaited boom for Insurance Telematics. Proponents of Insurance telematics have argued for ages that putting “black boxes” in the cars will be the Next New thing to the P&C insurance industry. They argue that we will see a shift in the pricing of car insurances when buyers accept a box in their cars that sends data on their driving habits to the insurance carriers. Given the information, the carriers will be able to reward the careful drivers with new innovative policies where the holders pay as they drive. The promise of this individualized pricing has given the Insurance Telematics technology many nicknames, e.g. Pay-as-you-Drive (PAYD), Usage based Insurance (UBI) and “Black Box Insurance”.
The EU ban on gender based pricing was supposed to be trigger point for the Insurance Telematics boom as presented in the Hype Cycle curve below. The telematics proponents argued that the legislation would drive the insurance industry to use a more granular and fact based approach, i.e. the actual driving habits, than gender. But, alas, the legislation took effect in January this year (2013) and we have not seen any Pay-as-you-Drive offers on the Swedish market yet. True, there are players in UK and Italy that are offering PAYD but without making any larger dents in the market share of the traditional policies. So, what will happen now? Will Insurance Telematics slip back into the valley of disillusionment? In this blog post, I will present three drivers that may push Insurance Telematics into a boom and what Gartner calls a plateau of productivity.
Personally, I think that the following drivers may be better levelers than the gender legislations to boost the adoption of telematics to innovate the underwriting and pricing of car insurances:
- Increased competetion from niche players. The Swedish Car insurance market has traditionally been dominated by four players (If, Trygg-Hansa, Länsförsäkringar and Folksam) that hold roughly 80% of the market. Other niche players have garnered good ratings by their customers but have not been able to really challenge the market share of the big four yet. But that might change in the wake of the legislation prohibiting pricing based on gender. Especially if the big players act in accordance with the international insurance association that challenged the legislation explaining that it would force them to raise the premiums for all their customers. I sincerely hope that some player (big or niche) will see the opportunity to rock the boat if we see a general price hike. Who can resist the temptation to leverage insurance telematics to offer lower premiums to their customers while minimizing their own risk as underwriter, especially on a stagnating market?
- New players and a new ecosystem. We can probably rest assured that insurance telematics will not be delivered from a clunky black box in the future and probably not from one of the established players today. There was a lot of buzz when Apple announced that they will assist Volkswagen with their upcoming Bettle model called iBettle. The press release was not especially exciting but there are many that see this a first step from Apple into another new industry . It might not be that Apple decide to revolutionalize the insurance industry like they did with the music industry but they may very well draw the attention to telematics and thereby establish a new ecosystem that will bring insurance telematics from the doldrums.
- Changed customer behaviour. The largest road block for insurance telematics has been privacy. Are you really willing to have a “black box” sending information on your location and speed to your insurance company? The decision from the big players to not offer insurance telematics this far is probably a wise decision based on feedback from their customers. But things are changing rapidly. We do not think about it any longer when we allow apps in our Smart Phones to use our location, even if we find it hard to understand what the particular app actually needs our location for. FaceBook reports that they had 1,7 billion location tagged posts and that was in 2012! Call me cynical, but I am sure that most of us understand that the police force and other authorities can triangulate our location in seconds based on our smart phones. So, why shouldn’t we allow an app from the insurance company to use our location, especially if it can save us some hundreds on our premiums?
I recently used the services of insplanet to ensure that the proposal to a renewal on my car insurance was competitive. It was, but the interesting thing was that insplanet called me five minutes after I completed my benchmarking on their site. To me, it is good customer service but, more importantly, an indicator that status quo will not prevail in the insurance industry. I am not sure that we will see a boom for insurance telematics but I am sure that we will see changes in the future with change agents that will rock the boat.