Telematic Data Collection Transforming Auto Insurance

Over the last year, Progressive has moved to the forefront of telematics-based auto insurance with its Snapshot coverage. The program is predicated on real-time data collection to calculate risk based on driving habits and mileage. The information is then used to calculate more accurate premium rates, and routinely results in insurance prices that are, at minimum, 30 percent lower than those offered by the competition to the same drivers.

Telematics Setting a New Auto-Industry Standard

According to a report by Celent, usage-based auto insurance policies that rely on electronic devices to collect real-time data will become the industry standard in coming months. Progressive currently covers a quarter of a million customers in the U.S. through its Snapshot program. The company just announced an additional patent for new technology that will allow for the expansion of its real-time risk monitoring, a fact not lost on the competition.

A Broader Use of Telematics

The potential for telematic data collection may, however, extend far beyond premium rates according to Celent. The latest generation of onboard devices make use of the 3G network for data transmission, and initial concerns about privacy have been overshadowed by the demonstrable cost savings of the approach.

The Celent report, “Telematics-Based Insurance: Has Its Time Finally Arrived?” points to the potential for real-time data collection to combat auto insurance fraud, and to provide consumers with insights on fuel consumption and CO2 emissions. That knowledge could not only alter the way they drive, but could potentially lower their overall cost of auto ownership and operation.

Separating Good Drivers from the Bad

With the current risk models, all drivers are essentially tarred with the same brushes. Younger drivers represent a greater risk, older drivers have poorer reaction time — the same old saws we’ve been hearing about drivers by type for years. This thinking does not, however, reward the exceptionally safe teenager or the very sharp elderly motorist who is as competent as ever behind the wheel.

The wider adoption of telematic-based insurance products will be powered by an industry imperative to keep the playing field level. If only a few major insurers are offering premiums based on real-time data collection, smaller companies will wind up with a pool of poor drivers who can’t get their coverage anywhere else.

Such a scenario would shift the bulk of the risk in writing auto policies on to companies that could well sink under the weight of claims payments. The only way to continue to share risk equally across the industry is for all insurers to assess risk the same way, which, increasingly, is to find out exactly how any one given customer really drives.

Before telematic technology, such a proposition would have been impossible. Now, it is emerging as an industry standard with the potential to substantially reduce premium rates. Interestingly, however, the same data that lowers the cost of insuring a vehicle may also change the drivers themselves, resulting in an upward safety curve. The bottom line is simple. Telematic data collection is a good thing, and it’s revolutionizing how auto insurance is written in this country.

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