Telematics is a popular subject in auto (motor) insurance today. There are articles on it almost every month in many of the trade papers, including making the “Top 5 Trends for 2013” list in Insurance Networking News’ November/December issue. It has also been the subject of reports by several respected analysts, such as Deb Smallwood’s Strategy Meets Action report titled, “Telematics/Usage-Based Insurance: A Catalyst for Change”.
Overall, telematics could, by itself, re-make the underwriting and pricing of the auto insurance industry. Adoption by insurers has been fairly slow for many potential reasons: investment hurdles, possible patent issues, lack of appetite for radical change and legacy system issues that create an operational barrier. The question that insurers need to look at is not the need to jump into telematics, the question really is, do telematics even matter?
What will make telematics, with its current definition as the primary tool for a Usage Based Insurance (UBI) model, inconsequential is the development of the self-driving car. As Celent Analyst Donald Light pointed out in his recent research paper, “A Scenario: The End of Auto Insurance”, the emergence of the self drive, or autonomous, car will completely redefine the auto insurance market, including the sales process, coverages, terms, pricing and underwriting of future auto insurance products.
While I am still resentfully waiting for jet packs to become a reality, autonomous cars are on the near horizon. Elements of self drive are already on the market – lane assist, self-parking, and variable speed cruise control are just a few examples that exist in cars today. Google took the lead in headline-grabbing advances on a fully functional autonomous car and was the kick start to legislative changes. Two states, California and Nevada, have made autonomous cars legal and many auto makers are working in prototypes. At the 2013 Consumer Electronics Show both Toyota and Audi have debuted autonomous cars while both Mercedes and Volkswagon are also developing an autonomous car – here is an excellent video of how the VW prototype works: https://www.youtube.com/watch?v=YZqL6j2D5H4.
The point here is that autonomous cars may be the norm before insurers are able to capture (let alone fully implement?) the benefit of telematics based pricing models. Not that the two are mutually exclusive, but chances are liability rates will drop so dramatically for autonomous cars that telematics (at least insurer sponsored telematics) will be cost prohibitive with minimal return on investment. In effect, autonomous cars will make telematics UBI irrelevant in much the same way that the internal combustion engine eclipsed the Stirling Engine.
Auto insurance models will be changing. There is no doubt about that. What direction and when remains to be seen and is dependent, to a large extent, on emerging automobile technology. Insurers that survive and do well in the changing market won’t necessarily be the first movers (long-term care has proved that). Rather, insurers that have clear visibility into their operational and underwriting performance, plus the flexibility to quickly change based upon those results, will be. Being able to capture market share is only part of the process. Monitoring profitability – as real-time as possible – with the ability to adjust pricing, underwriting and coverages both quickly and effectively will separate the winners from the rest of the pack.