Crescens George - Chartered FCIPD
What is Telematics?
Telematics in its pure technical sense is an interdisciplinary technology encompassing telecommunications , vehicular technologies, road safety, electrical engineering, sensors, instrumentation and wireless communications. It functions by sending, receiving and storing information via telecommunication devices in conjunction with affecting control on remote objects such as vehicles on the move. Most narrowly, the term has evolved to refer to the use of such systems within road vehicles , in which case the term vehicle telematics may be used.
What does Telematics mean within an insurance context? Or otherwise known as Telematics Insurance
Telematics can take two forms for motor insurance, a “Pay as you Drive” model where customers premiums can be generated on a monthly basis and reflect their level of usage. The more popular model is the “Pay how you drive” model in which premium is calculated based on the driving habits of the customer, using this to assess the level of risk that they present.
Telematics insurance works by fitting vehicles with a small device - commonly known as a 'black box' - that records a variety of data mainly focusing on the driver behaviour. Telematics will lead way to a fairer pricing system that is based upon the individual rather than a generic set of statistically-based assumptions.
Common data points of a typical Telematics system
Insurers use this data to calculate the cost of insurance and adjust the annual premium accordingly, with each aspect having an effect on the price that customers pay. Insurers will normally charge an up-front fee, which includes the cost of the device and its installation, and then quote a price for the annual premium which can decrease or increase month on month, depending upon the driving performance.
Time of the Day
Types of Roads Used
What are the advantages of the Telematics System in Insurance? Arguably the greatest advantage to black box insurance is that it makes the insurance premiums fairer. Insurance premiums are charged according to an individual’s actual driving behaviour rather than the demographic group that they belong to. This means that a young, male driver, whose auto insurance premium would otherwise in the past have been very high, can now reduce these costs if he is a safe driver. At the same time an older, female driver who drives frequently and dangerously will not be able to “take advantage” of the system simply on the basis of the demographic group she is in. Hence one of the advantages of telematics is that it will reward safe driving habits.
Telematics predominantly being a GPS (Global positioning system) based technology it is possible for insurance companies to determine the current location of a stolen automobile, thus it helps to prevent theft and enables the tracking of automobiles. This acts as a deterrent to stealing cars with black box technology, as well as making it easier to locate cars that have been stolen. In turn this reduces auto theft insurance premiums because of reduced claims.
Telematics Value Proposition – Moving away from Customer vs the Insurer to Customer & Insurer model
Telematics has shown an immense potential to turn the traditional insurance model up upside down. It is radically transforming the level of engagement between the customer and the insurer. In the traditional model usually insurer determines motor insurance premiums based on information collected at the point of sale based on - age, sex, annual mileage, credit score, driving record etc.. After the point of sale there is no much interaction between the insurer and the customer, with the exception of a few mid-term adjustments or the infrequent claims experiences.
However Telematics will add a new dimension to this and increase the level of engagement between the insurer are the insured. By installing telecommunication devises into cars that transmittingreal- time data on driving habits, road and weather conditions, insurers are now able to interact more with their customer and thus able to influence a more positive experience for both parties. Telematics could provide information to the customers on safe driving, enable active claims management, emergency accident response, theft security and many other new services.
Telematics has been shown to improve driver safety and thus leading to better insurance premiums, the in-car feedback and driving tips systems in some of the more advanced telematics systems have shown to have helped drivers make better manoeuvres on the road. This new technology will enable provide greater levels of information, both for insurers and consumers.
- Correct risk misclassifications
- Enhance pricing accuracy
- Attract favourable risks
- Retain profitable accounts
- Fight fraudulent claims
- Reduce claim costs
- Enable lower premiums
- Replace proxy variables with intuitive
- variables directly related to loss exposure
- Enhanced risk control by positively influencing good driving habits
- Reduce premiums
- Demonstrate safe driving habits
- Enjoy value-added services, including:
- Teen driver monitoring
- Emergency services
- Stolen vehicle recovery
- Reduce accident frequency and severity (e.g., via driver incentives and education)
- Reduce accident response time
- Track and recover stolen vehicles
- Establish fault to improve equity in settling claims
The Functional Model of a typical Telematics System
The Telematics unit or otherwise known as the ‘black box’ is fitted and concealed in the car. The blackbox usually contains a ‘SIM card’ similar to the ones used on our mobile phone devices. This unit functions and performance like a tracking device, it calculates and stores location, speed, direction of travel, time etc , all this is made possibly with the help of special sensors contained within the black box. The box communicates with the satellite using various GPS parameters, the role of the satellite is mainly to support various geo-positioning parameters set within the entire telematics system.
All the collected, calculated and stored data is then transmitted via telephone GSM cellular network to the insurance company’s servers. Here, the received data is processed against set telematics risk and underwriting criteria and saved against each individual customer’s file. The processed data is then used to calculate the premium. Unlike the traditional risk factors where insurers relied on proxies such as driver age, claims and credit-based insurance score. Telematics insurance indicates that directly measuring driving behaviours can significantly improve pricing accuracy when combined with traditional rating factors. A few of the particularly useful characteristics in predicting claims are:
- Verified mileage and garaging – this gives the insurer a realistic interpretation of the risk. This also assists the customer in knowing what their annual mileage is as many customers can struggle with estimating this.
- Speeding – historically customers driving habits are only reflected in any previous driving convictions, although those who may have been caught speeding by only marginal amounts and have opted to attend speed awareness courses do not need to disclose this, also there are the drivers who may regularly speed but have not been caught by traffic police of speed cameras. From a general road safety perspective this type of insurance calculations encourage drivers to travel safely, providing a financial incentive (in decreased premium) for doing so.
- Hard braking and cornering – Driving habits such as taking corners without reduced speed or regular hard or sudden braking suggest that the customer may present a higher risk in being involved in an accident. As with speeding this type of insurance can encourage drivers to be more cautious on the roads therefore creating a safer road environment for all.
- Day of week – trends in drivers travel time also help the insurer to measure risk more effectively, for example drivers who travel between the hours of 7-9am on weekdays are travelling at peak times, where more cars are expected to be on the roads and therefore present a higher risk of being involved in accidents. This also helps to make a fairer calculation.
- Time of day
- Type of road – different types present different types of risk, for example motorways and country lanes both present risks of accident, but the claim level can be very different for these, motorways present a risk of more vehicles being involved in a claim and therefore a higher total cost of the claim.
The insurers can use the software reading the collected data to alert them if there are sudden changes or developments from the black box. Much like banks use the credit card fraud system.
Insurers may choose to be alerted if a vehicle is taken overseas, used at an unusual time of day or if it has been involved in an accident. This can help with resolving misrepresentation and processing claims effectively.
The telematics also has the ability to pass feedback to drivers on their driving habits, all the tracked data such as speeding, braking, cornering, time of travel, mileage etc is included in the feedback sent by telematics to the driver. The driver is able to access this feedback either via their smart phone or using the personal computers and alter driving habits accordingly resulting in reduced insurance premiums.
Having communication with their insurer about their driving habits and premium increases the interaction between the consumer and their insurer with the added bonus of increasing self awareness of their own driving. This also gives the insurer an opportunity to actively show their integrity and fairness in the calculation of premiums, also making the premium easier to understand for the customer.