The insurance industry is rapidly embracing telematics, which lets companies check customers’ mileage so they can more accurately set rates. Insurers are taking many approaches for what’s called usage-based insurance, using different types of boxes and diverse cost structures.
Many insurance companies have rolled out programs over the past couple years. Customers in many states can now use telematics systems to precisely detail their driving, typically saving money by providing companies this data. In a keynote speech at the recent Insurance Telematics USA 2011 event in Chicago, Robin Harbage, Director of consulting company Towers Watson, told attendees that the fast-moving telematics industry will become a dominant factor for automotive insurance.
“The technology will change, but that shouldn’t matter,” he said. “It’s the ultimate end game that matters. In four years, companies will either be usage-based insurers or they will be secondary providers.”
The market has already grown to a significant size. Though some major players do not yet offer usage-based programs, most insurers have completed trials and are expanding into more states.
“Three fourths of the market is already doing something,” Harbage said. “Sixty percent of the companies have telematics offerings in one state or more, and 17% have pilot projects.”
He also noted that 17 states already have four or more usage-based insurance programs. In those states, insurance companies have enough competition that they need to provide some differentiation.
One of the driving factors behind this growth is the cost of telematics equipment. The tipping point for connectivity hardware is $100, while the cost of wireless connections must be less than $40 per year, Harbage said.
Though cost is an issue, some insurers charge drivers a minimal amount to participate. For example, Allstate charges Illinois drivers a $10 technology fee.
Some insurance companies offer modules that can be installed by consumers or insurance agents. These boxes typically plug into the vehicle’s OBD II connector. Other boxes must be installed by professionals who hardwire them. While some continue to monitor drivers over the long term, others such as Progressive Casualty Insurance only take a snapshot of their driving habits.
“Progressive tells drivers their new rate 30 days after the module is plugged in. The device is removed after five months so the company no longer has to pay wireless charges,” Harbage said.
For users, the discounts can be significant. GMAC Insurance, which uses data gathered by OnStar, offers reductions of up to 54%, with an average of 26%. Others offer a reduction of at least 10%, with maximums between 20 and 50%.
While telematics will change the way drivers are charged, it’s not likely to alter some habits. Harbage noted that insurance is a “sticky” business because many customers tend to stay with one provider for fairly long periods.
“Telematics probably won’t cause customers to switch very often unless companies find a way to share data,” Harbage said.