It’s 2025, early evening and you’ve just left the office and got into your car to head home. You remotely turn up your home thermostat to ensure it is warm upon arrival and your car telematics device quickly assesses the best route. You reverse carefully, mindful that good driving behaviour earns you discounts on your insurance premium. You get home with time to spare for a 20-minute run, recorded by your activity tracker, and noted by your life and health insurer.
This is one vision of the future in which the internet of things (IoT) promises to transform the way consumers behave and interact with their insurance providers. It is a vision that today’s telematics and wearable device providers are striving for. But there are significant hurdles to overcome before the industry can progress along this digital journey, not least of which is whether consumers are willing to share so much data about themselves.
Telematics, or black box insurance, has steadily grown market share in the young driver segment, where customers are happy to have their driving behaviour monitored in return for lower premiums. But it has yet to make significant inroads into other market segments. For consumers, it’s a question of “what’s in it for me”, says Jamie Macgregor, senior vice president of Celent’s Insurance Practice.
A lower premium is the first answer, particularly for young drivers where the cost of insurance for under-25s is eye-wateringly high. “Insurance is cost driven, and there are a lot of things you can do with different segments to reward loyalty, aid retention and make it a fun experience, but these things are modified factors,” says Selim Cavanagh, vice president of telematics at Wunelli. “At the end of the day motor insurance is a compulsory purchase and we all know from aggregator research that 90 per cent of buyers go for the quote which ranks at the top of the aggregator site, because cost is the most important factor.”
Safer driving is fewer accidents and the way we operate is to reward them for that
Safety is important, of course, particularly for young drivers and their parents. Research suggests the existence of a telematics device can reduce the risk of accidents by up to 30 per cent. “The risk we write isn’t the risk we keep, we make our drivers safer still,” says Charlotte Halkett, group marketing actuary at insurethebox. “Safer driving is fewer accidents and the way we operate is to reward them for that.”
Brand is expected to play a progressively more important role in encouraging individuals to share their data. But a generation that has grown comfortable with sharing data with trusted brands, such as Facebook, Amazon and Google, may not feel the same way about its insurance carriers.
“Insurers like the IoT because it creates an opportunity to have a more frequent advisory relationship with the customer that they don’t have today, hopefully reinforcing brand and with it customer retention. And that promotes good risk behaviours, which is good for the underwriting result,” explains Mr Macgregor. “But to get to that trusted position you do need to invest in brand, and show you are acting and behaving honestly with your customers’ data.”
This is best achieved through a carrot rather than stick approach to risk. Customers who are penalised with curfews and higher premiums will be less incentivised to part with their data than those whose behaviours are reinforced through “positive messaging”, says Mr Macgregor. And perhaps surprisingly, less is more from a feedback perspective. “The more information you communicate to your customer about their digital behaviour, the greater the risk is in turning people off,” he explains. “It may feel a bit too much like big brother is watching and people are generally not that interested.”
Rewards offered by health, motor and home insurers need to vary depending on the customer. While a young inexperienced driver may appreciate constructive feedback on their driving behaviour, this is far less likely to be appreciated by a seasoned motorist. Here, discounts and other benefits, such as accident response, emergency breakdown assistance and fraud prevention, could be more compelling for the customer.
Barriers to adoption
But what if the barriers to adoption of wearables and IoT-connected devices are not down to a lack of consumer appetite, but a result of issues that are not being addressed by insurers? “Longstanding insurer models, legacy systems and relationships are major barriers to full adoption,” says David Hill, founder and managing director of Advent Solutions Management. “For that to happen, insurer models and relationships need the infrastructure and the mindset.
“IoT is arguably as much a threat as it is an opportunity as young entrepreneurs unencumbered with legacy issues nip in and take their business. However, while established insurers are not as agile as newer players, they are experienced and business savvy and many are investing in IoT to discover what is really possible.”
Kevin Roberts, broker and affinity director at Legal & General, thinks that ultimately the challenge for insurance players is to work collaboratively as new technology emerges. “Finding solutions together that ensures data and technology can be used when required is paramount. We must remain curious and entrepreneurial,” he says.
However, high expenses are a major impediment for insurers seeking to offer customers competitively priced IoT-based products. “The biggest barrier in telematics is the cost of data collection,” says Mr Cavanagh. “Clearly the young driver segment is a big success in the UK, but it helps the business case that the cost of young driver insurance is relatively high compared to the norm. Therefore, there’s enough money to pay to install a device that will collect the most data.”
Smartphone apps are one way of reducing the cost burden. However, there are limitations to the level and accuracy of data that can be collected this way. “There is such a variation of different products available,” says Ms Halkett. “And there’s not a simple solution for data portability. We are talking to other insurers about that, but because there are so many different models for telematics, it’s really not simple. What we do with our data is completely different from what an app provider would do.”
Mr Cavanagh concludes: “Seventy eight per cent of motorists think the price they pay for insurance should be linked to driving behaviour. There are some structural changes needed in the insurance industry for that to happen with pricing, but customers are very clear about what they want, and for me that feels like a win-win. I don’t think the whole market will go telematics next year – it won’t be one big bang, but there will be constant significant growth.”