Drive Connected - Hughes Telematics, Inc

Insurance and Telematics

As the automotive insurance world continues to explore the use of telematics devices (i.e., communication systems linked to vehicles) to generate information about vehicle operations and driver characteristics, most participants in this novel technological foray are not fully aware of the most beneficial element s of these systems. Likewise, while the terms “usage-based insurance” (UBI) and “pay as you drive” (PAYD) insurance are finding their way into the popular lexicon, little is understood about the broad implications of emerging telematics capabilities for the automotive insurance market.

Certainly and intuitively, motorists who drive fewer miles represent a lower underwriting risk than those spending more time on the road. Similarly, aggressive or careless behavior evidenced by sudden starts and stops, high speeds and reckless cornering are clear indicia of increased risk. And further, Mom was right when she said “nothing good happens after midnight,” or during rush hour, for that matter. Driving late and during periods of high traffic congestion also prove to be instances of increased driving risk. Capturing such driving characteristics and applying them to various underwriting models makes good business sense - benefiting both insurers and safe, low-mileage drivers.

So, is that all there is? Are the benefits for insurers of on-board telematics systems - either OEM or consumer-installed - limited to the generation of a broader array of underwriting criteria? Commonsense would say emphatically, “No!” In fact, even without extensive empirical data, insurers should predictably expect to lower costs and increase customer satisfaction through intelligent investigation into and implementation of the broad benefits of telematics systems.

There is often quoted, and equally often debated, conventional wisdom that “receiving first notice of loss within 30 minutes of an accident can reduce claims resolution costs by an average of $800.” Whether this is actually true, there is hard evidence to support the general proposition that delay in receiving notice of loss leads to higher costs. Analysis conducted on 60,000 claims over two years by Diamond Management & Technology Consultants found the average payout to be 20% higher for claims reported a day or later after the event.

An on-board telematics device can certainly produce enormously valuable data and connectivity in the event of a claim. Vehicle telematics systems can yield tremendous benefits in quickly and efficiently assisting with managing the claims process. And that’s without even fully accounting for the use of on-board sensors to potentially clarify fault via speed and directional G-force information. Furthermore, according to Diamond’s research, a mass adoption of insurance telematics systems could result in up to a $20 billion savings in incurred losses for the insurance industry by reducing theft and fraud, shortening claim cycle times, lowering the number of disputes, and providing detailed accident reports.

Without thoroughly identifying and calculating all the potential benefits to claims resolution of telematics-enabled vehicles, below are some of the most obvious items that insurers should consider and evaluate when implementing a telematics program:

Efficient towing. Expensive towing to equally expensive lots beyond the control of insurance companies is only the beginning of the costly claims process. The presence of a telematics device can enable a vehicle to immediately and automatically notify an insurance company to dispatch a tow truck to the scene of an accident. Quick accident responses can potentially reduce the costs of primary/secondary tows, and can ensure the wrecked vehicle ends up in a location that best serves the interests of the customer and the insurance company. Direct towing to a preferred repair facility or to a lower-cost negotiated lot can immediately save insurers money routinely lost when “gypsy” tow trucks - or those owned by a friend of the first responder - get to the wrecked vehicle first. Of course, another advantage of telematics, in the context of towing, is knowing the precise location of an accident and potential towing event, which saves valuable time. Gone are the days of tow trucks being dispatched to vaguely-understood locations. GPS technology can yield precise locations and can even signal when a vehicle needing a tow has been moved, either by another tow truck or through the help of a Good Samaritan.
G-force predictors of vehicle and bodily injury. The ability to make a remote assessment of the damage to the vehicle and passengers can prove highly valuable to an insurer. If an insurance company can immediately understand that a 1.2 G-force accident is not likely to total a vehicle or result in soft-tissue injuries, it can respond in a different manner than when a vehicle and passengers are involved in a 6 G accident, almost surely resulting in a totaled vehicle and seriously injured passengers. With such instant notification of the severity of an accident, insurance companies can develop response protocols, triage accidents, and assign personnel according to adjuster skill-sets or specialties.
Vehicle tracking during the repair process. How many times are vehicles undergoing the repair process “misplaced” or sitting idle in a repair lot while the insurance company continues to pay for a replacement rental car? With a telematics system - provided that the primary battery in the vehicle has not been destroyed or disconnected - insurers can track the location and status of a vehicle in the repair process. Is the vehicle in the body shop, the paint shop, awaiting parts or being repaired by the mechanic? Or worse, is it dormant by a back fence while a “higher priority vehicle” is serviced? Such information would not only help an insurer know more about the vehicle undergoing repairs, but would also generate additional criteria for evaluating the effectiveness of repair facilities.
Customer Relationship Management. Customer satisfaction during the handling of a claim is really where the “insurance rubber meets the road.” Information released by the National Association of Insurance Commissioners (NAIC) indicates the top three reasons consumers in 2007 filed formal complaints against their insurance companies were delays, denials of claims, and unsatisfactory settlement offers. A happy customer is one who is managed quickly, professionally and kept fully informed. A happy customer is one who is offered enhanced services based on the severity of an accident by an adjuster or customer advocate. A happy customer is one who can track his or her vehicle’s progress during repairs via the internet or mobile app. A happy and well-attended customer is more likely to stay with an insurance company over extended renewal cycles. Consumers talk, and a happy customer’s referral is invaluable. Additionally, a happy customer is less likely to call an attorney. According to research conducted by Diamond, a claim that engages an attorney is four times more likely to have a higher payout than a claim without attorney involvement. Further, the average payouts for claims with attorney involvement are roughly three times higher than those with no attorney. Attentive service provided to customers in their times of need - such as prompt delivery of rental cars to accident scenes - could help reduce the likelihood of attorneys getting involved.
Fraud Reduction. Stories are legendary about people in minor accidents who allege serious bodily injury - soft tissue or otherwise. In the era of “get rich quick,” drivers and passengers too easily “forget” the truth of what really occurred in an accident - or even if there was an accident at all. Diamond’s research has shown that 33% of bodily injury claims from auto accidents include some type of fraud where claimants overstate the severity of injuries. Telematics systems provide insurers with a tool to better understand whether there was an accident, when it happened, where it occurred, and its severity. The application of such technologies can result in significant savings for insurers through the identification of high-probability cases of “padding,” prompt resolution of fraudulent claims, and in accurate determinations of what really occurred. Diamond estimates these savings could reach $2 billion for insurers annually.

Aside from non-existent accidents or injuries, major metropolitan areas are rife with insurance customers who inaccurately report to their insurers where their vehicle “sleeps” at night. Particularly in more affluent areas, it is not uncommon for customers to register a vehicle and pay insurance rates in a lower cost area where they may have a second home, despite the fact that the vehicle operates almost exclusively in a higher cost locale. Unfortunately, there are many other rating criteria about which drivers are untruthful, including mileage and usage, driver and vehicle characteristics, vehicle-driver assignment and more. As noted in a 2010 report by Quality Planning, numerous analyses show that drivers who misrepresent or lie about their policy-rating information are associated with a high-loss experience. The report also found insurers lost nearly $16 billion dollars in 2008 alone due to premium rating error.

Such “rate evasion” (also called “premium leakage”) can be significantly reduced by the introduction of valuable telematics systems. Utilizing GPS or cellular triangulation can precisely (or even generally) provide conclusive evidence of the geographical range of operation of a vehicle - resulting in more accurate (and honest) allocation of risk. Similarly, annual mileage can be precisely measured by on-board telematics systems, preventing that type of driver misrepresentation.

Vehicle condition. As has become widely understood through the linkage between credit history and risk, a similar linkage is likely between vehicle condition and risk. A consumer who does not promptly respond to resolve a check engine light is likely the same type of customer who may be careless in other aspects of his or her daily life. While no studies have yet occurred to assess this potential indicator of risk, intuition would suggest it to be more likely true than not. Regardless of the predictive nature of vehicle condition data, insurers offering remote vehicle diagnostics as a service to their customers would increase customer loyalty and satisfaction. Drivers would greatly value the ability to “decode” their check engine light. Nothing is more aggravating to a consumer than driving around not knowing if the glowing check engine light on their dashboard indicates a serious issue demanding immediate attention, or one that can be resolved at their leisure. Many current telematics systems are able to remotely deliver information on both vehicle system diagnostics and vehicle emissions - a “green” plus to both consumers and insurance companies. Drivers could also use such information to better understand what mechanics tell them - or don’t tell them.
Stolen vehicles. As noted by Diamond’s research, the value of stolen automobiles was $8.6 billion in 2005, and $2 billion was paid toward preventable loss claims in that same year. Only 62% of the roughly 1.2 million vehicles were recovered. Here, telematics can play a significant role by assisting with the location and recovery of stolen vehicles (via GPS tracking or cellular triangulation) and by providing a potential deterrent to would-be thieves (in the same way a home security system might deter a burglar).

As vehicle telematics systems become more pervasive in both factory-installed and consumer-installed settings, forward-thinking insurance companies taking the time to understand and implement telematics programs will attain market-leading positions in both profitability and consumer satisfaction. Those ignoring the impending ubiquity of this technology will be forced to play an expensive game of catch-up. As detailed investigations into the benefits (and limitations) of telematics continue to be undertaken, insurance companies will be better equipped to segment their markets and develop unique offerings for new and existing customers.

Sources:

Cars and Trucks are Talking: Why Insurers Should Listen. By Paul Blase, Mark Purowitz, Tom Kavanaugh, and Subhrajyoti Ghatak. © 2008 Diamond Management & Technology Consultants, Inc. Available at: www.diamondconsultants.com/PublicSite/ideas/perspectives/downloads/Telematics_Diamond.pdf
Auto Insurance Industry Leaves Billions on the Table. ©2010 Quality Planning. Available at: http://www.qualityplanning.com/research/auto-insurance-industry-leaves-billions-on-the-table.aspx