The potential risks for insurers and consumers who spurn telematics1 December 21, 2017 at 3:17 pm by Peter Morris
Not everyone has embraced telematics. It was reported the other day that at least one insurer has been told by its brokerage force that their customers are ‘not fans of telematics’. Carol Jardine, chief strategy office for Wawanesa, is quoted as saying, ‘Our customers that buy from our brokers do not wish to have a telematics device installed in their car.’ Fair enough. Telematics is not for everyone. What, though, are the risks facing insurers and consumers who turn their backs on this technology?
Telematics as a technology has advanced rapidly. Up until fairly recently telematics was powered by a device attached to the vehicle. This technology is now being displaced by applications that are downloaded onto a consumer’s smartphone. Either way, the insurer ends up with information about the policyholder’s driving behaviour. This information is then used to calculate a discount for the policyholder’s automobile insurance.
For insurers that fail to embrace telematics, there is a risk of being selected against. If other insurers are able to improve their underwriting results by offering discounted premiums to consumers who accept telematics, it is reasonable to assume that, over time, these insurers will insure an increasing number of above-average drivers. As the better drivers migrate to companies that offer telematics discounts, the insurers that do not offer telematics will face the prospect of insuring an increasing number of below-average drivers. In order to keep pace with the resulting increase in claims costs, these insurers will need to bump up their insurance rates, thereby widening the gap between telematics and non-telematics insurers. This widening gap will only accelerate the migration of better drivers to insurers offering a discount for telematics.
A potential weak spot associated with telematics is that insurers that offer telematics often award a discount to drivers merely for signing up. Where there is an option to accept telematics, the decision is made by the insured, not the insurer. This element of self-selection, combined with an automatic discount for signing up, would be fine if only the best drivers signed up and received the discount. The problem is that many drivers over-estimate their skill level. Mathematically, half of all drivers are better than average, and half of all drivers are below average. However it has been reported that, due to an illusory sense of superior performance, 90% of drivers think they are better than average. Presumably, over time, under-skilled drivers who opt for telematics will see their discount diminish or disappear. Still, for insurers, it means that at least for a while they will collect less than the right premium for these drivers.
Assuming any bugs associated with telematics pricing can be worked out, it is not only late-to-adopt insurers who risk being left behind: consumers also run a risk. As insurers perfect their telematics offerings, the premiums for consumers who opt for telematics will be increasingly better than the premiums for those who spurn telematics. As noted earlier, this will attract better-than-average drivers to insurers that offer telematics. Insurers that don’t offer telematics will end up with a disproportionate number of poor drivers. These insurers will have no choice but to increase their premiums in order to keep up with the losses these poorly-skilled drivers produce. But not everyone who spurns telematics does so because of poor driving skills. Some consumers will resist telematics because of its Big Brother undertone. The result will be that consumers who spurn telematics because of concerns over their privacy could pay more for their insurance simply because they have been lumped in with consumers who have below-average driving skills.
I don’t have a crystal ball. If I did, I would have made my fortune on the stock market years ago. If I did have one, I expect it would tell me that insurers and consumers who embrace telematics will, over time, have an advantage over those who don’t.
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The problem with telematics, apart from consumer selection, is that the insurers can’t price appropriately for the risk. They have to offer a discount, but what if the driver habits indicate they need to charge a premium? Their only option is to decline the coverage because, as I understand it, telematics cannot be used to increase premiums.