Vehicle Telematics offers property and casualty insurers new approaches to determine premiums on car insurance. Using vehicle telematics, insurance premiums are not determined by common rate factors such as mileage, type class and claims-free discounts, but by evaluating actual driving behavior. For usage-based car insurance, the extent and type of usage is obtained and used for calculating rates. Depending on the evaluation of these metrics, an individual premium is determined. In this new approach, careful drivers will pay lower rates than drivers who take more driving risks.
The information used to determine the metrics requires the wireless transmission of data across large spatial distances. This is possible with advanced digitalization. In order to take advantage of the driving data, new technologies such as the electronic emergency system eCall, will need to be installed in new cars effective from 31 March 2018. Car insurers can make use of similar technologies – e.g. through the installation of their own telematics boxes – for a more accurate calculation of premiums based on actual driver behavior analysis.
Variants of Vehicle Telematics Based Premiums
For usage-based car insurance, two variants are generally available: Pay-as-you-drive (PAYD) and Pay-how-you-drive (PHYD). For PAYD scenarios , the data is read via a subsequently installed telematics box which will be checked with more frequency to determine driving characteristics. For PHYD based scenarios, the premium determination is based on actual driver behavior.
The recorded telematics parameters can be divided into two groups:
- Speed (if applicable, exceeding thereof)
- Acceleration behavior
- Braking behavior
- Handling of curves
= Individual driving
- Day of week
- Road type
- Population density
= External influences
Depending on these characteristics, the insured person might achieve premium savings. Driving on roads with less traffic or during off-peak times is considered low risk, whereas using certain country roads with frequently occurring fog banks is assessed as higher risk. The insurer determines the different weighting of the individual components and uses these to calculate the overall result. The risk-relevant assessment is performed by determining a score, by awarding points for “good” behavior and determining an overall score.
Possible structures for Insurers
In principle, insurers have various options for the structuring of the premiums. For example, they specify,
The criteria for which metrics should be recorded and assessed should correlate with the risk of damage to comply with the principle of attribution of benefits according to cause.
Benefits of Vehicle Telematics Based Premiums
One objective which insurance companies hope to achieve with vehicle telematics is the reduction of automobile claims by influencing the risk behavior of the driver. Premium discounts are earned through safe, low-risk driving. In addition to preventing or mitigating damages, telematics concepts can contribute to raising the company’s profile in a competitive environment presenting them as a strategic forward-looking provider in the insurance industry. Furthermore, the new technology allows for the reporting of accident information in real-time directly to the insurer. The claims can thus be significantly reduced through the acceleration and automation of the process. A basis for more accurate and efficient claims management is therefore ensured.
Only with sufficient monetary incentives on the customer side, will a customer switch from a classic approach to a vehicle telematics based approach. This may be especially attractive for young drivers, who tend to have higher car insurance premiums.
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