Telematics - the future of Insurance Ecosystem
When I boarded an Airport Taxi, recently, I was with my family. Like many others, my father is a kind of person who wants to be at the airport or a train station at the earliest. I have an intuition that he might have sent signals to the taxi driver that we are in a hurry (not that rest of us were relaxed either!). Anyways, so the taxi driver decided to take controls in his hand. The moment the taxi hit the express-way, we were traveling - with fair speed. I was about to take a glance at the speedometer when a recorded voice declared -"You are exceeding the speed limit, please slowdown". That's 'Telematics' I announced for the benefit of audience. In fact, a more appropriate term for my self-initiated announcement would have been "Vehicle Telematics".
Telematics has been the buzz word in
the auto insurance industry for quite some time now and rightly so. As
mentioned in my
previous blog, it represents one of the most disruptive innovations in recent
times for the insurance industry. The idea is to capture the real-time data and
transform it to either a 'Usage Based Insurance' (UBI) or a 'Pay as You Drive'
(PAYD) insurance. The UBI is basically governed by the amount of time you spend
behind the wheels while PAYD encompasses your behavior (e.g. speeding) while driving, along with the mileage
driven. The 'behavior' component is essential to differentiate between two
drivers - both travelling the same distance over a period - one does a daily
commute during the rush hour in a hurry to not miss the morning appointment,
while other doing a leisure travel during the weekends.
The traditional implementation of telematics
device would be a black box integrated along with other on-board-devices in the
vehicle and making use of satellite and cellular network. A more recent
innovation is the advent of smart phones. Smart phones could make use of a
suitable mobile app, the inbuilt GPS and the accelerometer to send and receive
data over the mobile network. The result of all this would be multidimensional.
The underwriters would be assessing more relevant and updated information to
write policies with actual risks. The drivers would have an opportunity to
reduce their premium and deductibles by showcasing their good driving behavior.
The society would get not only a safer road (refer PAYD insurance) but also a
greener one (refer UBI).
One area which is still undiscovered
- in terms of using telematics - is 'Life Insurance Underwriting'. As we know
life insurance is a complex product and needs more expertise in underwriting. In
that sense, the use of telematics should be considered a farfetched idea. Underwriters
usually want to factor in all possible facts that might affect the mortality
risk of the applicant. Premium amount for a policy is typically driven by a
person's health history and lifestyle (relate it to the behavior aspect we discussed a while earlier). Smokers end up
paying more compared to non-smoker. While a person with possible heart risk
might end up paying more than a person without. Thrill hunters who love 'Auto
Racing', 'Sky Diving' or rock climbing might well be denied a cover.
Life Insurance policies often include
an "Accidental Death Benefit" (ADB) rider along with the normal policy. Most of
the insurance providers are offering this rider on a flat rate basis or rather
very minimal underwriting. An ideal scenario would be if underwriters were to
establish some kind of formula to rationally charge for the ADB rider. The
'behavior' part of the life underwriting decision should also consider the
applicants behavior on road and how it contributes to the risk. With the
increased use of 'telematics', there might come a stage when life insurance
underwriters start seeking that information. Like the credit scoring system, a
'safe driving index' system might eventually make its way to provide
information to the auto industry as well as life industry.
Although the implementation of telematics
itself comes with pre-packaged concerns which can be discussed at length, one
cannot deny the potential of this disruption. It could lead to new ways of
underwriting as well as product development. In an ideal insurance ecosystem,
be it auto or life, telematics seems to be a promising part of the
future-state.
