21st Century Insurance: Powered by TelematicsHow to gain strategic advantage in an increasingly connected world
by Ralf Küfner October 2017
Telematics is not only expanding its role as a connector of industry value chains, but also disrupting the insurance sector by fundamentally altering how risk is evaluated and premiums are set. In fact, as insurance companies leverage telematics insurance to get predictive real-time data, telematics is even challenging the traditional role of insurance as a passive participant in policy-holder outcomes by getting proactively involved in damage and loss prevention. The end result of these efforts are more accurate premiums and fewer payout events, both of which drive incremental margin for insurance companies.
What is Telematics?
Telematics can be described as the collection, transmission and intelligent usage of data. From a high-level technical perspective, telematics collects data via sensors (e.g. on machines), sends it locally to a centralized hub and transmits it via Bluetooth or em- bedded cellular technology to a cloud platform. From there the data can be used to power a broad array of data-driven solutions.
The Role of Telematics in Automotive Insurance
For many policyholders, when they think of auto insurance, they immediately think of semi-annual or annual premiums that are initially set based on statistic rating factors like age, car category, etc. This means that a very responsible driver who only occasionally uses a car is effectively subsidizing a frequent driver of similar age who likes to impersonate a Formula One driver.
Acknowledging this flaw, and spotting an opportunity, insurance companies got the idea of using feedback from new telematics advancements to shift the application of this data from real-time monitoring to predictive analytics that could be used to set premiums based on usage (a.k.a. Usage Based Premiums). In its simplest incarnation, usage based premiums employ a ‘Pay As You Drive’ approach where telematics devices track miles driven and premiums are higher for drivers covering greater distances.
These basic approaches have quickly been supplemented to leverage the vast array of telematics technologies to incorporate how a person drives – the way they accelerate, corner and brake, for example – to derive a more complete picture of the type of driver behind the wheel. This data is then paired with algorithms to determine the odds the individual will get in an accident in the future, and premiums are set accordingly.
With recent AI advancements in facial and emotional recognition being incorporated into vehicle operating systems, one can even imagine a world where the emotional state we are in while driving – something that certainly impacts how we drive – will be incorporated into how much we pay for the right to be insured. In essence, mechanical and human data can be merged to provide a more complete picture of risk.
High-Level Benefits To Auto Insurance Companies
In addition to benefiting society through a reduction in accidents, insurance companies benefit in a few important ways:
1. By pricing risk more accurately, insurance companies are better able to set premiums in adherence to their economic models and therefore generate more predictable financial profits.
2. The increased attention drivers give to how often and how aggressively they drive reduces the number of accidents, which ultimately reduces the number of payout events insurance companies need to cover.
3. By establishing a form of interactive dialogue with drivers via telematics models, insurance companies are able to cross-sell additional offerings.
Positive Impacts on Safety
Given the personal risk one assumes from reckless driving, one wouldn’t think individuals would need small financial incentives to drive more safely. But according to a recent survey of US-based drivers on ‘Pay As You Drive’ programs by insurance industry-supported IRC, 36 percent of respondents said they have made small changes in how they drive and 18 percent said they have made significant changes.11. Insurance Research Council. (2015, November 18). Telematics Devices Prompt Changes in Driving Behavior. Retrieved August 20, 2017, from Insurance Research Council: http://www.insurance-research.org/sites/default/files/downloads/TelematicsNR11172015%20%282%29.pdf
Fortunately, these security benefits should continue to mount as user-based insurance (UBI) programs continue to expand. Insurance companies have launched nearly 230 telematics programs worldwide, and UBI programs in the US and Italy now represent roughly 30% of new business among insurance companies that have made telematics a priority.22. Telematics will "uber-ize" the auto insurance industry: PTOLEMUS study. (2015, December 16). Retrieved August 20, 2017, from https://www.canadianunderwriter.ca: https://www.canadianunderwriter.ca/insurance/telematics-will-uber-ize-the-auto-insurance-industry-ptolemus-study-1003943706/
In addition to positively impacting the way humans operate their vehicles, telematics additionally enables vehicles to communicate directly with each other, opening the door to autonomous responses that can proactively prevent accidents from ever occurring.
From a geography perspective, it seems the US will likely become the leading UBI market in the world, followed closely by Europe and, in the near future, China and Russia.33. Hallauer, T. (2014, March 27). The rise and rise of telematics in insurance. Retrieved June 20, 2017, from http://www.telit2market.com: http://www.telit2market.com/3385/rise-rise-telematics-insurance/ By 2020, nearly 100 million vehicles globally will be insured with telematics policies, a number that is projected to grow to nearly 50% of the world’s vehicles by 2030, generating a massive €250+ billion in premiums for insurers.44. Telematics will “uber-ize” the auto insurance industry: PTOLEMUS study. (2015, December 16). Retrieved August 20, 2017, from https://www.canadianunderwriter.ca: https://www.canadianunderwriter.ca/insurance/telematics-will-uber-ize-the-auto-insurance-industry-ptolemus-study-1003943706/
Telematics has the potential to serve as a catalyst for massive change in insurance markets across several industries.
The Role of Telematics in Health Care Insurance
Within the health care space, many of us who have purchased life insurance are familiar with medical questionnaires and physical tests intended to enable personalized premiums. But historically, health insurance has either been the product of a national, one size fits all insurance program or an area where premiums are based initially on a simplistic categorization such as age combined with a questionnaire to consider the state of health for individual premium supplements. As we all know despite these premium supplements, the variance within a band of citizens is vast, an important reality that forms the foundation of large health plans: people who don’t heavily use their insurance pay for those who do.
Telematics-based health insurance enables insurers to proactively determine who will likely be the biggest consumers of costly health services. The data to power these algorithms comes from wearables such as FitBit, Jawbone and Apple’s iWatch, which collect detailed information about people’s activity levels and heart rate. And simple smartphone-compatible devices, such as the Withings Wireless Blood Pressure Monitor, can provide more granular personal data.
From a rollout perspective, the German government has recently taken a leadership position through gematik, an electronic health insurance card company set up by the German healthcare industry to trial it’s secure telematics infrastructure. Partnering with a large German corporation, the program is enrolling roughly 500 care givers in Bavaria and Saxony to exchange telematics healthcare data as a dress rehearsal for its launch throughout Germany88. Telekom Healthcare Solutions. (n.d.). Telematics in healthcare. Retrieved June 20, 2017, from https://www.telekom-healthcare.com: https://www.telekom-healthcare.com/en/medical-practices-and-others/telematics/telematics-in-healthcare/telematics-infrastructure-connects-it-systems-32290. If successful, this would provide a blueprint for how to solve one of the most important pre-requisites of scaling the initiative: how to build ecosystems – and the requisite underlying data platforms – that support the exchange of the various data needed to appropriately price patient risk.
Interestingly, while fancy data such as FitBit-enabled step counts get much of the glitz, providing the insurance industry a full picture also relies on fundamental data such as vital signs at doctor visits. To bring all of this information into one place, robust IT systems are required to accurately route and secure the data to the locations where decisions need to be made.
Looking to the future, the introduction of telematics into health insurance has the potential to disrupt the core economic models upon which national systems are based. Given the incredibly wide variance between health costs between citizens – in the US, for example, 1% of patients account for 23% of total costs99. Graham, J. R. (2014, November 5). 1 Percent of People Account for 23 Percent of Medical Spending. Retrieved August 20, 2017, from http://healthblog.ncpa.org: http://healthblog.ncpa.org/1-percent-of-people-account-for-23-percent-of-medical-spending/#sthash.1rlBrYRH.xzRauwBo.dpbs – simple math suggests that if enough healthy people take advantage of these plans, costs to high-risk patients will need to go up, raising important questions that will need to be worked through on a local and national level.
From an insurer’s perspective, the benefits of telematics in this space look very similar to those in auto insurance: an increased ability to accurately price risk, a reduction in payouts thanks to insured parties taking a more proactive role in their health, and an increased ability to cross-sell additional products via a more interactive customer relationship.
The Role of Telematics in Real Estate and Construction Insurance
Thus far, we have primarily spoken about how telematics data can use historical and real-time data to more accurately price risk in the future, something that also applies to the real estate insurance sector. But in real estate, we also see additional examples of how telematics can enable the insurance industry to take an active role in shaping real-time outcomes, not only pricing risk but reducing it.
When we speak of real estate insurance, we’re specifically talking about insurance that guards against catastrophic incidents, such as earthquakes and floods, as well as homeowner’s insurance guarding against more common incidents such as non-catastrophic water damage, fire or theft for example.
From a passive data collection perspective, insurance companies can provide personalized discounts for occupants that install networked smoke alarms, sump pumps and security systems, all of which statistically reduce the chance that a costly insurance incident occurs.
We move into new territory, however, when insurance companies evaluate the full feedback loop of the systems in play. There is, for example, a big difference between a smoke alarm that simply sends an intermittent signal to an insurance company saying it’s powered up and an alarm that notifies a homeowner’s smartphone that a fire has been detected. By incentivizing full feedback loops – and measuring the corresponding reduction of costly claims – insurance companies begin to play a deeper role in shifting the math related to negative outcomes.
We can find parallel examples in the construction industry, which, as we noted earlier, has long struggled with theft in some markets. To combat this, construction operators can install advanced telematics systems offering geo-fencing and unauthorized use/movement alerts. In a sector where only 23% of stolen equipment is successfully recovered, proactive prevention is crucial, and is something insurance companies are willing to provide financial incentives to install1111. Live View GPS. (n.d.). NICB Releases Top Types of Heavy Equipment Stolen. Retrieved August 20, 2017, from https://www.liveviewgps.com: https://www.liveviewgps.com/blog/nicb-releases-top-types-heavy-equipment-stolen/. Additionally, to reduce costly water damage, sensors can be installed in homes to notify owners when water is present, a piece of information that can enable a situation to be addressed before it becomes a major issue. Similar to other insurance verticals, this direct client communication gives insurance companies more opportunities to suggest adjacent products that apply to that individual’s needs.
Enabling a Complete Solution
As we have shown, the number of ways companies can source data from disparate locations and people continues to rapidly expand. And this data will increasingly enable firms to both streamline operations and obtain meaningful breaks on insurance premiums.
To capitalize on this opportunity, however, companies need a comprehensive IT strategy in place to support it with three key layers:
A Data-Driven Future
As we’ve seen, telematics has the potential to serve as a catalyst for massive change in insurance markets across several industries. In addition to dramatically improving a firms’ ability to personalize and more accurately price risk, it can additionally provide a new channel for an interactive dialogue with consumers. This new relationship can serve as a powerful foundation to both influence customer behavior – therefore reducing payouts – and also provide important cross-sell opportunities for newly imagined products.
To position your company to capitalize on these exciting developments, it’s vital to architect an IT infrastructure that enables an extensible telematics infrastructure capable of collecting an ever-changing roster of information and seamlessly sharing that data with third parties. Companies who fail to do this will become increasingly isolated in an increasingly connected world, but those that build platforms that enable them to be nimble will earn an enduring strategic advantage.
Associate Partner, Head of Insurance Germany
Ralf Kufner is as Associate Partner at Infosys Consulting responsible for the Insurance practice in Germany and therefore for the Digitalization offerings for the German insurance market. In his 20 years of consulting experience he was focusing mainly on the optimization of core insurance processes and the corresponding IT systems. Based on his deep knowledge of insurance products, processes and IT environments, he supports his insurance clients by managing their current challenges in the area of Digitalization and Artificial Intelligence.
Consultant, Telematics Expert
Alexander Börsch is an experienced consultant in the German digitalization team and mainly focuses on insurance clients. He realizes business value for clients by applying new telematics solutions. Alexander has deep project management knowledge and received a Top3 place for Best Project Manager under 35 (GPM Award 2015). He has more than four years of experience in consulting national and international clients in the financial services industry.