IoT set to accelerate disruption of car insurance sector

Toni Sekinah, research analyst and features editor, DataIQ

The adoption of autonomous vehicles by the automotive industry is starting to pick up pace. Nick Walker, insurance expert and RAC’s former UK telematics managing director, witnessed BMW set up a building outside Munich and fill it with 2,000 engineers to develop autonomous driving. Despite Volvo's driverless cars being confused by kangaroos, its autonomous vehicle programme is coming along in leaps and bounds. At the start of the year, the Swedish car maker was already giving self-driving cars to members of the public to road test. As Walker told the IoT Smart Summit, the company is so confident about its autonomous vehicles that, if one crashes, it will be replaced with no questions asked.

That move would leave insurers out in the cold as there would be no need to insure vehicles anymore. Therefore, insurers will have to adopt technology if they want to move forward, Walker said. “Technology is a key part of the future and, if they don’t embrace it, they will die,” he said. The technology he is referring to is telematics or IoT and the potential is enormous. According to Gartner, there are 8.4 billion connected things in use in the world right now, a number that will increase to 20.4 billion by 2020. Of those, 250 million will be connected vehicles.

Walker used Norwich Union as an example of an insurer that pioneered the concept of telematics in vehicle insurance 17 years ago. He said that, back then, the cost of a telematics device was £235, whereas nowadays, "if someone pays more than £50 they are being robbed". Also, early devices were not very sophisticated as they were only able to give information on the location of the car, whereas now, telematics devices can tell you how the car is being driven, where it is, how it’s being used, what condition the vehicle is in and if it has been involved in a crash.

The high price of the hardware and the insurer thinking that discounts had to be given meant that, initially, telematics-enabled policies only got limited market access as they were only offered to people with expensive policies. “That’s why it got stuck with young drivers and it’s why it’s only got a market penetration in the UK of around 10%,” Walker said.

Customer acceptance is a massive barrier to the expansion of the vehicle telematics insurance. When he worked at RAC and the company was approaching customers and offering to put telematics in their cars, drivers responded with a flat no. As Walker said: “Nobody likes being tracked.”

To make sure that they remain compliant with the incoming GDPR regulation when collecting data about their customers’ driving behaviour, the insurers will have to take only data that is relevant to their relationship with the customer. He said: “There is an element of permissions. As long as the customer says it is OK, you can take that data. The core thing is, you’ve got to be able to prove conclusively that the data you’re taking and keeping is relevant.” Walker said, as an example, an insurer collecting driving behaviour and location data about a customer would not be able to market to them, offering them a voucher for a fast food because it had noticed there was a restaurant nearby. He added that GDPR is going to put some very big walls around what can be done and what can’t.

Another obstacle is the complexity of the data. The sensors will return data of different sizes and speed, both static and changing. Therefore, it would take “some real high-end maths” to analyse and compute that data and figure out the true risk level of a particular driver.

Despite these challenges, Walker highlighted the benefits to insurers of incorporating telematics data into their policies. One advantage is being able to assess risk more effectively, which can lead to reduced risk, reduced claims and, consequently, reduced costs. Walker referred to insurers that have "knocked drivers off their list" for questionable driver behaviour.

Another is that engaging with customers leads to an increase in retention. “Simple things like monitoring driver behaviour and being able to intervene with advice means you’re going to increase retention because you’ve got a better relationship with your customers,” said Walker. He also said that using technology creates the opportunity to combine services. Car insurance and roadside assistance are necessities for drivers. Put together, a customer has a stronger incentive to remain with or sign up to a particular provider, especially if warnings or alerts about the state of the vehicle reduce the need for roadside tows.

Walker advised incumbent vehicle insurers that they can bring in telematics to their offerings by buying companies, setting up an investment fund, or creating an incubator or partnerships. Balancing the opportunities with the challenges, Walker expressed clearly what vehicle insurers should do: “What I fail to understand is why insurers aren’t beating doors down to technology providers or innovators to grab some of this because it really is game-changing.”

(James Drake-Lee, head of InControl operations, Jaguar Land Rover, and Ozgur Tohumcu, CEO, Tantalum, will be talking about connected vehicles and services at this year's DataIQ Future on 19th October. For more information, go here.)

Knowledge-based content manager, DataIQ
Toni is the senior features editor responsible for the origination of DataIQ's interviews, articles and blogs.