Insurance companies getting serious about telematics

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Progressive is leading the charge to employ telematics, capturing data with programs in 23 states.

The rise of telematics is expected to drive a sea change in the insurance industry. Insurance companies want to gather data on vehicle usage, and consumers who sign up for programs may be able to cut their costs.

Usage-based insurance is starting to take hold as telematics links make it possible for insurers to monitor vehicle movement. There are a number of fledgling efforts in the U.S., and Europe has already seen significant acceptance.

“To date, the U.S. industry has seen 74,000 activations. I expect that to pass 300,000 by 2015,” said Kyu-min Oh, Senior Automotive Analyst for Frost & Sullivan. “In Europe, over 400,000 drivers have opted for usage-based insurance.”

Most North American users are now part of test marketing or early rollouts, Oh explained. Full-fledged rollouts will begin over the next couple years. Progressive is one of the industry leaders, offering usage-based insurance in 23 states.

Others also foresee strong market growth. A spokesman for the state of California, which approved the use of pay-as-you-drive policies early this year, predicted a major opportunity for telematics during a presentation at the recent Insurance Telematics USA conference in Chicago.

“Now, the vast majority of insurance companies rely on estimates by customers with very little cross checking,” said Adam Cole, General Counsel for the California Department of Insurance. “Telematics is clearly the way to go to improve that.”

Some insurance providers are equally bullish. “This innovation seems cutting-edge today, but in the future it will be a given, just like airbags and seatbelts,” said Ed Collins, Assistant Vice President at Allstate.

Insurers note that there are significant benefits to be gained. Differentiation is one that impacts consumers, who seem interested in the possibility of saving money while being at the cutting edge of new technology. Another is that the additional data will help insurance companies better manage their risks.

“This provides data for risk segmentation, letting you identify the risky folks who cost you the most money,” said Richard Smith, Director of Auto Product Management for Liberty Mutual Agency Markets. “One issue is to show when the vehicle is driven. Most fatalities occur between 1 a.m. and 4 a.m.”

Most of the early moves into usage-based insurance use dedicated communication boxes supplied by insurers. But some suppliers have teamed up with OnStar, leveraging General Motors’ huge installed base. As telematics systems make their way into other vehicle lines, they will probably be used to gather data for insurance companies.

“We need to partner with the telematics folks,” Smith said. “The more you can package in seamless offerings, the better off you will be.”

Dividing the cost by sharing expenses with other providers addresses one of the stumbling blocks that could slow growth. “One of the biggest roadblocks is the initial cost of hardware itself,” Oh said.

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