Telematics: What’s New?

Marty Epstein, FCAS, MFEGlobal Auto Actuary, AIG

Casualty Actuaries of Greater New York (CAGNY)December 6th, 2012

What is Telematics Anyway?

Broadest definition: the technology of collecting, sending, receiving and/or storing information via telecommunication devices

or

Telematics Today

The three most popular Telematics products in use: in vehicle navigation systems, stolen vehicle recovery systems and fleet management systems

A distant 4th most popular product is what current discussion focuses on most: Pay How You Drive, Pay As You Drive, or User Based Insurance

Global Adoption of Telematics

Telematics products are most common in countries with high rates of theft (Italy, Brazil, South Africa) or in expensive, sophisticated markets (UK, Western Europe, United States)

Penetration of Telematics products is globally very low but expected to grow gradually until product is commonplace (10-20 year timeframe)

Drawbacks with Current Telematics Offerings Too expensive for most markets

Hardware is pricy, though becoming cheaper Data plans must be purchased for each device

Too complicated Operationally complex Data volumes can be massive, challenging to interpret Pricing implementation is a challenge

Intellectual property/patent claims on existing technologies act as a barrier to entry

Most insurers are taking a wait and see approach or investing smaller amounts in pilot projects to test program viability

Expected Changes in Telematics Landscape Smartphone’s are now being piloted to enhance or

replace dedicated boxes for the collection and transmission of driving data

Mobile only solution is a fraction of current operational costs with the advantage of piggybacking on the customers own mobile plan

Also, the user experience can be dramatically enhanced as context relevant information can be displayed immediately after completing a trip and a variety of additional services can be made available

Mobile phone solutions have their own drawbacks, such as estimating the risk of the phone owner which may not be the same as the vehicle risk

Some countries have plans for mandating Telematics

Singapore plans to mandate use Telematics devices to determine fees for driving on public roads

Brazil seeks to reduce theft through mandatory Stolen Vehicle Recovery systems

Expected Changes in Telematics Landscape Risk models that use Telematics data will soon consider the

context of driving events, advancing sophistication Current models adopted in the US market that determine price credits from

mileage, braking, accelerating and speed data may be considered crude relative to their potential accuracy

Some examples of driving context:

▪ How do you evaluate a drivers risk if she exceeds the speed limit but travels at the average speed of other drivers on a particular road segment at a particular time? What if she is driving in inclement weather?

▪ Is a driver more risky if you learn that he often brakes midway through a turn rather than before the turn?

▪ What is the risk difference between a driver who rarely texts while driving and one who frequently texts while driving? What if the “texter” only does so while the vehicle is not in motion?

Psychological profiles are being mapped to driving data as a way to understand and explain driving behavior but also to predict behavior of customers in situations outside of driving

What’s in it for me? (Current Customer Value Proposition)

Most common incentive for enrolling in Telematics in the US is the potential for premium reduction: Progressive: “you could save up to 30% extra for your good driving”

Allstate: “rewards safe drivers with the big savings they truly deserve”

State Farm: “you have control of how much you save, with the opportunity for discounts up to 50%”

Additional services are offered by some programs, for example, State Farm’s In-Drive program (monthly fee based): Get help locating your vehicle if stolen

Vehicle diagnostic reports

Emergency response notification

Monitor high-risk drivers in household, such as teen or elderly drivers Pay as you drive offers a way for low income and uninsured

drivers to acquire insurance

Future Value Proposition

Context specific driver education Praise for things you did right, guidance for things you could improve

Eco driving (feedback on your CO2 footprint and how to improve) eCall (in vehicle emergency service call button)

Planned for the EU in 2015 Claim submission and accident reconstruction

First notice of loss (identify location and time of crash, allow user to attach photos of damage)

Verify facts such as speed prior to impact, location of impact(s), estimate likelihood of property damage and soft tissue damage; reduces fraud risk

Gameification / social networking Prizes for “safest driver”

User portals with detailed information on driver behavior Targeted driver safety training and alerts for families with

inexperienced or elderly drivers

Implications

Insurers will have an opportunity to dramatically change the interactive experience with their customers

What can be learned about your driving behavior will be used to help predict your behavior in other situations (subject to user agreements) Insurers will have an opportunity to understand their

customers behavior in ways only dreamed of until now

Human behaviors to be measured such as: aggression/calmness, focus, consistency, thrill seeking, avoidance, pacing

Implications

Pandora’s box of nearly unlimited, intimate data is open, whether we like it or not

Insurers have been loathe to use the stream of data out of fear of being called “big brother” or seen as taking advantage of privacy standards

Technology focused companies are jumping in to driver safety space with new ideas that have the power to transform the insurance business

How will customers make a value judgment as to whether they should share their data? Worst-case scenarios have mostly been speculative so

far

Questions for Discussion

Will the addition of Telematics data to loss cost analysis result in a significant or only marginal lift in predictive power?

Does the use of Telematics data bring us too close to individual risk rating? What might be the unintended consequences?

Telematics models indicate that many drivers ought to receive a surcharge rather than a credit for their riskier than expected driving – US insurers currently only provide price discounts (no discount for riskier drivers) -- is this sustainable long-term?