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.