Telematics Offer Insurers Refuge from Driverless Car Pinch
The motor insurance industry faces a significant shake-up from two waves of technological innovation, Fitch Ratings says: the growth of telematics and the development of driverless cars.
We believe telematics will have the bigger impact on the industry for at least the next five years, particularly in the UK, where take-up could grow rapidly. But self-driving vehicles from companies such as Google and Tesla could completely reshape the sector in the longer term. UK insurer Direct Line’s results on Tuesday revealed that it has doubled the number of telematics policies in a year. These policies involve the use of equipment to monitor driving behaviour, allowing the insurer to more accurately assess risk for individual policyholders.
Overall telematics penetration remains low at about 2% of Direct Line’s motor insurance policies, but among under-21s it is around 60%, reflecting the significant discount these policies can offer. The UK has some of the highest premiums for young drivers, and high rates of fraudulent claims, suggesting it could be one of the biggest adopters of telematics. Direct Line’s high take-up by young drivers and good retention rates point to strong growth of telematics policies over the coming years. This could accelerate further if the government provides incentives for the use of telematics products.
Attracting older drivers is likely to prove harder as the potential premium discount is likely to be smaller than for a new driver and because they may be more wary of the monitoring technology. But if telematics can develop a track record of identifying fraud such as “crash-for-cash” scams, the peace-of-mind benefit could make it more attractive, particularly in markets like the UK, where fraudulent claims add about GBP50 to every policy.
Early movers in telematics could be at an advantage among insurers as it enables them to much more accurately price the risk of a driver than traditional pricing factors such as age, postcode and type of car. Early evidence suggests that the lower premiums on these policies are more than offset by cost savings due to better risk selection and better driving behaviour by policyholders with telematics. We expect driverless cars to take much longer to affect the sector. The technology has yet to be developed to the level where it is allowed on the road in most countries, and then it will initially be fitted in only a small minority of new cars, whereas telematics equipment can be fitted in any existing vehicle.
The eCall initiative will require all new vehicles in the EU to be fitted with telematics devices by April 2018, giving insurers the opportunity to use the infrastructure. But in the long term driverless cars could have a bigger impact by completely reshaping the insurance model. Traditional and telematics policies are both based on the driver’s profile, which would become irrelevant for a fully automated vehicle. A premium would therefore probably consist mostly of product-liability insurance. Or the liability could end up on the manufacturer, with insurance effectively included as part of the purchase and servicing costs.
Driverless cars could also lead to a reduction in direct ownership if they enable people to hire a car at very short notice whenever they need it, which would further complicate the insurance picture. The potential long-term impact on insurers is therefore difficult to quantify. But it could range from an increased commoditisation and simplification of motor insurance policies, to writing policies to cover an entire auto manufacturer or hire company, or the gradual shrinking of the motor insurance sector.