New technology is enabling telematics to gain popularity.
This article was written by Ranjini Paramalingam, Associate Director & Katia Farrugia, Advisory Assistant
Blackbox Car Insurance, Pay-As-You-Drive or Pay-How-You-Drive are all names used to reference Telematics Car Insurance. It is an emerging technology, where the policyholder can benefit from cheaper motor insurance premiums and is set to change the way insurers currently underwrite new business.
This is done in four simple steps. In the first instance, the insurer installs a telematics device in the policyholder’s car. The device in turn tracks the driving skills of the policyholder depending on their car usage. Thereafter, the data gathered is analysed on a frequent basis, and finally, good drivers will be charged a lower premium. Traditionally, motor insurers used to set premiums based on the data related to the driver, which included the demographics of the driver, claims history, and up to some years ago on gender - although this is now no longer permitted due to the European Union Gender Directive which was implemented in 2012. Moreover, information on the type of car being driven such as the model, power and speed was also required to set motor insurance premiums.
Telematics devices are usually very small and once installed, they start recording information on the driving behaviour. This feature allows the insurer to determine how safe the policyholder is. Vehicles are equipped with GPS (Global Positioning System) technology which tracks their whereabouts and, in addition, the information recorded by the built-in GSM (Global System for Mobile communication) technology is sent directly to the insurer. The data collected includes: driving speed, total mileage driven, distance travelled, location of the car, type of roads travelled, braking and accelerating patterns, and the time of day when the vehicle was used.
More recently, new technology is enabling telematics to gain popularity. Instead of the traditional manual installation of physical devices, this process can now be done through mobile phone applications which
are much easier to download and install.
Telematics car insurance was introduced because policyholders felt that they were being unfairly charged for their motor insurance policies due to the demographic segments they fell under. For instance, young drivers were charged higher premiums because they were deemed to be reckless and therefore presented big insurance risks - although there are some exceptions to the rule.
Therefore, the main benefit of telematics car insurance is that the motor insurance premium is lower for those drivers who show that they are safer on the road than others. Rather than relying on statistics which are based on past trends, premium pricing allows for more individualisation and precision, as individual and current driving behaviour is used. Moreover, as data is made available through online portals, policyholders can monitor their own driving performance and, in a way, control their motor insurance premiums.
An advantage for insurers is that telematics can enable them to accurately assess and quantify accident damages and therefore help to reduce the number of fraudulent claims. The telematics box will register crucial data about a car accident such as the direction, speed, vehicle position and even the angle of vehicle collision which will help determine whose party is at fault. This is also advantageous from the policyholder’s perspective, as claims will be settled more easily and fairly.
The telematics device also helps to achieve more road safety. Policyholders can be alerted when they brake too hard or drive too fast, therefore prompting them to tame their driving. Also, people may be encouraged to drive more carefully because of the fact that they are being monitored. Moreover, having to pay higher premiums can act as a deterrent for recklessness. Ultimately, all of this will help to reduce road accidents. UK insurance industry statistics show that there is a 40% decrease in the risk of accidents when a new driver has a telematics policy.
Inspite of all these benefits, privacy issues relating to the use of personal data still remains one of the top concerns for most people. Through the use of these devices, insurers are able to track the policyholders and gather information which policyholders may deem as sensitive, such as their location at any point in time. What would insurers do with this data? Share it with third parties? However, aren’t most of us already willingly and, at times unknowingly, sharing personal data online? Therefore, are policyholders generally against the use of telematics due to privacy issues or because they are afraid of what the device can and will record?
Developments in the Maltese motor insurance market has seen the introduction of two telematics-based policies by two local insurance companies. These policies take the form of PAYG (Pay-As-You-Go) which is based on mileage and PHYD (Pay-How-You-Drive), which is based on behaviour. Both policies are targeted at young people between the ages of 18 and 30. Looking at different cases from abroad, telematics insurance has been popular not only with the younger cohort but also with older segments of the population. Therefore, introducing these policies to other segments might prove to be beneficial and feasible both for insurers and policyholders alike. In March 2016, the British Insurance Brokers’ Association (BIBA) said that telematics policies can offer savings of up to 25% in the motor insurance premiums especially for young drivers.
It is important to note that the use of telematics is only in its early stages in Malta, and thus, one cannot accurately measure the success (or failure) of telematics until sometime has been allowed to pass.
The fast pace of technological advancement, including the phenomenon of driverless cars, is helping with the growth of telematics car insurance. Technology is helping to improve both the effectiveness as well as the costs associated with the use of telematics devices. It is only through the use of telematics that insurers can gather better driving data to be able to priced price insurance precisely for each individual, according to the risks presented.
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