Step Aside Credit Score: How Mobile Telematics Has Revolutionized Car Insurance

by Raja Chakravorti
Kyle Schmitt, contributor

One of the outcomes from the COVID-19 pandemic: the auto insurance industry can no longer hide how broken it is. Historically, traditional car insurance companies have based rates primarily on irrelevant data like credit score, gender, age, and ZIP code — punishing good drivers with high insurance rates. For drivers who don’t fit into some ideal mix of demographic data, high rates have been a heavy burden to bear, while insurance companies amass billions in profits by harshly punishing consumers.

As the pandemic continues to impact driving habits, consumers and insurers alike are realizing driving behavior is the leading indicator of risk; however, few insurers have the ability to measure the driving competencies of their customer base — although the technology to do so has increased exponentially. A decrease in mileage has been observed as a driver behavior trend throughout the pandemic, but this can deceive insurance carriers, especially pay-per-mile policies, as severity in driver behavior has increased as a consequence of fewer vehicles on the road. In recent years, smartphone telematics has rapidly matured, providing an unprecedented tool to measure driving behavior, uncover new risk, and reshape the automotive insurance landscape.

It will also get harder for insurers to avoid using telematics in ratings. A recent Front & Sullivan analysis suggests that there is an increasing appetite for usage-based insurance (UBI) policies that is expected to surge past 100 million drivers in 2020, dominated by Italy, UK, and the US.

“An April 6 Geotab analysis of 7 major U.S. cities found increases in speeding and “instances of harsh braking and hard cornering. Drivers familiar with driving in congested cities are now more liberated in these very same areas, so fleets should carefully monitor driving behavior during this time to help ensure the safety of their employees on the road during this unprecedented time.”

This white paper breaks down the rationale behind the strengths of telematics usage, explores some of its caveats, and begins to extrapolate beyond auto insurance pricing use cases. Additional white papers will offer a technical deep dive on the differentiating power of telematics in risk segmentation, as well as other telematics use cases outside of the auto insurance industry.

Uncovering Hidden Risks

For decades, the car insurance industry has relied heavily on the same set of antiquated factors to assess a driver’s risk: prior incidents, credit history, policyholder demographics (like age, marital status, gender, and ZIP code), prior insurance, and vehicle information.

These factors were somewhat arbitrary and far from perfect, but they improved over time — thus, increasing sophistication in pricing and reducing uncertainty in loss costs. However, the onset of telematics-enabled pay-how-you-drive (PHYD) programs, like Progressive Snapshot™ and Allstate Drivewise™, revealed that critical information was being left out of the equation.

Incorporating specific driving behaviors like hard braking, hard turning, night driving, and speeding (among others) has proven to reduce loss ratio from 10%–30% (relative to loss ratio without telematics incorporated).

While telematics has already made a tremendous impact on auto insurance pricing, it is only the beginning. Technologies are improving, telematics rating plans are expanding, and upstarts founded on the promise of mobile UBI — like U.S. based Root Insurance — are disrupting a century-old industry. For example, new pricing models that leverage distracted driving data emerged in late 2018 and 2019, capturing entirely new risk signatures. And it is likely that the next groundbreaking refinement is just around the corner.

For an insurer without a telematics program — or with a less sophisticated program like mileage only pay-as-you-drive (PAYD) models — the risk of adverse selection is palpable. Telematics-enabled competitors are becoming better every day at identifying and underwriting out bad risk, upending pricing to the open market.

Increasing Fairness

Traditional rating factors afford little opportunity for a driver to take control of their insurance premium. A driver cannot travel back in time to eliminate a driving incident, and they cannot alter demographic information like age. Perhaps, over time they can increase their credit score or trade in for a safer (or less expensive) vehicle, but these would require meaningful shifts in lifestyle that are often not easily realized, and more importantly, are not directly tied to driving risk.

Telematics turns this outdated model on its head. Drivers are informed of the risk factors and empowered to make changes to their driving habits in order to reduce their risk — resulting in lower insurance rates and more savings.

Moreover, introducing telematics moves the auto industry toward actually measuring the root causes of accident risk. For instance, some insurers correlate credit scores with a higher probability of having a claim, but nobody thinks that missing a bill payment causes an accident. And for many consumers, the cause of a low credit score can be from an uncontrolled event like a medical emergency or job loss. Distracted driving, on the other hand, is something that drivers entirely control and directly causes accidents.

Rating on modifiable and causal behavior brings fairness to an archaic pricing model.

Changing Behavior

By pricing on modifiable behaviors, the auto insurance industry finally has a way to properly incentivize drivers to reduce risk. Studies have shown a willingness and demonstrated tendency for drivers to curb bad behaviors to save on insurance. To cite a few:

· An often cited study by the Insurance Research Council found that 56% (of 1135 drivers) changed how they drove after installing a telematics device. Importantly, a vast majority of these drivers reported receiving information from their insurance company about how they were driving. [Citation: https://www.insurance-research.org/research-publications/auto-insurance-telematics-consumer-attitudes-and-opinions]

· A similar study by Willis Towers Watson found even more motivation among millennials, with 84% expressing a willingness to modify their driving behavior to earn a better premium. [Citation: https://opencommons.uconn.edu/cgi/viewcontent.cgi?article=1563&context=srhonors_theses]

· Behavioral science researchers at the University of British Columbia, working with an internal dataset from a major U.S. insurer, found a 21% reduction in hard-braking events over a six-month period for UBI enrollees, influenced by a combination of pricing discounts and coaching. [Citation: https://pubsonline.informs.org/doi/10.1287/mksc.2018.1126]

· TrueMotion and Cambridge Mobile Technologies, two well-established telematics service providers (TSPs), have found anywhere from a 20% to 35% reduction in phone handling for drivers who actively engage with their application platforms. [Citation: https://www.latimes.com/business/la-fi-distracted-driving-insurance-phone-texting-20190429-story.html]

An insurance telematics program should be a no-brainer: it offers the ability to identify and remove negative risk and subsequently price safe drivers more affordably — all while making the roads safer for everyone.

The Power of Mobile and How to Address Challenges

Now that we’ve assessed the social and fiscal implications of telematics, let’s focus on the intricacies of this mobile technology and its capacity to enact change.

The telematics UBI market relies on 1 of 4 sensor solutions: black box installations, OBD-II plug-in devices (aka dongles), mobile phone applications, or OEM embedded systems. [Citation: IMS — COMPARING SMARTPHONE, SELF-POWERED, OBD, BLACK BOX, AND OEM EMBEDDED DEVICES Data Collection Technology Comparisons]

Each solution has consequential advantages and challenges. The table below explores how smartphone applications differ from the 3 installed solutions.

The power of mobile

Unparalleled scalability: Access to a smartphone is nearing ubiquity in critical insurance markets. Most smartphones released since 2015 feature the requisite sensors to power a UBI program. This prevalence makes mobile unquestionably the most scalable sensor solution.

Low cost: Costs go down as scale increases. Leveraging an existing customer resource saves the insurer on hardware and installation (e.g., upwards of $50 for OBD-II programs), cellular transmission (sometimes up to $1 per month), or partnership agreements across multiple vehicle OEMs. Saving on these costs is key to a robust ROI.

User behavior insights: The mobile solution is unique in its ability to track user-phone interaction. Sophisticated algorithms can discern locks/unlocks, phone calls, texting, scrolling, navigation, etc., allowing the insurer to pinpoint sources of risk behind the distracted driving epidemic.

User engagement: Mobile applications are an increasingly common way to connect to the end user, even when telematics is sourced from a different sensor solution. In this sense, costs to maintain a mobile app user experience are virtually unavoidable no matter the telematics solution. User engagement can create behavior changes and there is evidence that it improves retention.

Powerful sensor arrays: Across the market — Apple, Google, Samsung, Huawei — today’s mobile hardware is equipped with a powerful sensor array including accelerometer, gyroscope, barometer, magnetometer, and microphone. Insurers and Telematics Service Providers (TSPs) are putting these sensors to use in ever innovative ways, like discerning when a driver’s phone is in use by a passenger.

What’s the catch?

Privacy concerns: Unlike other solutions, the mobile phone travels with the individual outside of their insured vehicle. That, together with growing public awareness of data collection, has resulted in elevated privacy concerns. Insurers need to provide transparency and clearly communicate value propositions, while also having contingencies for when customers restrict access to data, like location services.

Measuring speed: Unlike other solutions, mobile does not have access to the vehicle’s Controller Area Network (CAN bus), which (crucially) provides speed directly from the vehicle’s onboard system. Mobile instead uses less reliable GPS data to derive vehicle speed. This can be overcome, but it requires expertise that few insurers possess internally.

Battery limitations: Mobile has more battery restrictions than the other solutions. To remain a tenant on a user’s phone, battery responsibility is key. Below some battery threshold, trip collection may become infeasible. Working with a TSP who understands and mitigates these concerns is critical to growth and retention.

Reduced platform stability: The tradeoff to the massive scale attainable with mobile is running on hardware platforms and within operating systems that are always in flux. TSPs need to work year-round to proactively and reactively mitigate the effect of changes on derived driving features. Insurers need to develop models that are resilient to artificial shifts in driving features, should they occur.

Detachment from vehicle: A sensor physically attached to the user, instead of the vehicle, is a double-edged sword. While it enables distracted driving identification and more precise risk attribution, it creates other challenges. Chief among these is discerning trips that occur outside of the insured vehicle — as a passenger, on a train, etc. Many TSPs offer algorithms that algorithmically classify modes of transportation. Many insurers permit their users to provide manual labels. In some cases, mobile applications are paired with a fixed Bluetooth device to more accurately tie data to the insured vehicle. But all of these solutions introduce additional measurement challenges.

The use of black box and OBD-II solutions is likely to wane with the continued rise of mobile. OEM connected car solutions will play a decisive role in the future of UBI. But with 5 to 10 years before connected car solutions achieve the ubiquity of mobile, combined with the lack of a unified platform for connected systems, it is clear that mobile will be the most profitable and scalable solution for UBI programs over the next decade.

Due to the numerous technical challenges involved, the most successful insurers in this space will be those who partner with mobile TSP. Among that group, the most powerful and reliable UBI underwriting and ratemaking will be derived by TSPs who have access to large volumes of credible loss and traditional premium data, as they can more quickly help insurers apply mobile telematics ratings to existing customers.

Beyond Auto Insurance Pricing

Telematics data and insights are creating consumer and supplier advantages across a variety of markets, including insurance, the gig economy, retail, and healthcare.

In auto insurance, there is significant potential to disrupt claims, providing adjustors with a richer set of information from which to ascertain fault, fraud, and triage information. In rideshare and other fleet applications, operators have unprecedented insight into the factors that influence their costs. Across the spectrum of retail, including consumer insurance, telematics facilitates innovative segmentation and targeting strategies to power highly efficient ad campaigns. Most notably, in healthcare, telematics can be used to better estimate the spread of pathogens.

The rise of mobile telematics is remaking how we measure risk and behavior, benefiting consumers and businesses in concrete ways. Companies, regulators and consumers should be taking steps to encourage faster adoption of mobile telematics to accelerate how quickly those benefits can be felt across industries.

Find out more at root-enterprise.com