Can Telematics Solve the Automobile Insurance Pricing Problem?

The other day, I was speaking with Sean Horan, an AT&T M2M application sales executive, and we got on the subject of usage-based automobile insurance.  It looks like telematics (a combination of GPS, mobile computing and cellular communications) will be the solution to the automotive insurance industry’s problem of accurately pricing premiums. Until now, actuarial risk factors (such as the number of miles and the time of day driven) were difficult to verify and were based on industry estimates or on information volunteered by customers.

One of the largest UBI (usage based insurance) pilots was performed about five years ago by Norwich Union (recently rebranded as Aviva), one of Great Britain’s largest insurance providers.  According to Aviva, for its pilot Norwich Union installed telematics “black boxes” in customers’ cars to track how far they were traveling, the time of day, and the type of road they were on. Knowing the type of road is important because, for example, motorways are ten times safer than urban roads.  With this information verified, insurers could give a better rate to those traveling on motorways versus those who travel mostly on urban roads.  Time of day is also important because driving at night, especially for young drivers, is significantly more dangerous than traveling during the daytime.

The Value Telematics Can Bring

With telematics, it is possible to know the time of day and the road on which a customer is driving. This information can be used to generate, in real time, individualized penny-per-mile tariffs.  Based on that information as well as the total number of miles driven, a very accurate premium can be calculated.

During the time Norwich Union performed this pilot, accident claims among younger drivers alone dropped by about 20 percent. That is a staggering statistic and it represents a huge benefit in terms of road safety. The use of telematics enables insurers to more effectively incentivize good driving practices. For example, increases in premiums could dissuade some young drivers from driving during the most dangerous times, such as on a weekend night, when they are 14 times more likely to be involved in an accident. They could seek safer alternatives—such as taxis or public transportation—and save money on their auto insurance as well.  Customers were also saving approximately 30 percent on their premiums.  Telematics leads to other benefits as well, such as improved emergency roadside assistance.

The Future of Telematics

Although Norwich dropped its program in 2008 due to disappointment with the acceptance rate of the service, I think there is a bright future for the concept.  Moore’s Law suggests that processing power of electronics increases over time, leading to lower costs for equivalent processing power.  Assuming the price of telematics technology falls over time, these lower costs can open up new market opportunities and make existing market opportunities more appealing.  That is why I look for automobile insurers to begin offering UBI as an option to their customers as the costs for telematics devices decline. Drivers who choose telematics-based products will be those who perceive themselves as having good driving practices and who expect to see those practices translate to a savings in their insurance premiums.


More information on this topic can be found from EMB, an insurance consulting company.

In what industries would you like to see telecommunication companies provide additional data?
In what other ways do you think Telematics could augment other vehicles?
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