#26 - Telematic insurance, a chicken-and-egg story

I have been observing the development of telematic insurance for personal lines for over fifteen years.

Back in time, observers predicted that telematic insurance should reach a certain tipping point to change the market landscape. As of today, we can see that this dynamic is underway in certain geographies, while it has not taken hold in some others.

On paper, however, telematic insurance has some serious advantages, which would suggest that it should be emerging everywhere.

• For drivers, it offers personalized insurance rates based on a more objective risk assessment.

• For insurers, it provides an opportunity to offer an experience focused on truly individualized prevention.

• Data sharing in exchange for a (price) advantage is more widely accepted by the public than before.

• Using smartphones to capture driving data is as reliable, simpler, and cheaper for insurers than the OBD sensors used in the early days.

• TSPs (Telematic Service Providers) provide insurers with the scoring module and the mobile app integration kit, saving them from having to undertake significant technological or actuarial developments.

Yet, some markets remain on the sidelines. Is this a coincidence or inevitable? The take-off of telematics is a bit like the chicken and egg paradox:

• The egg: policyholders are ready to switch to telematics, provided the price difference is significant enough.

• The chicken: telematics requires a structured prevention approach led by the insurer. Insurers will only commit if they believe there is sufficient demand.

The reasons for slow takeoff

How can insurers be convinced to make their move first? What I can see or hear in the French market is representative of the factors limiting their appetite.

• Car insurance traditional offerings are diversified, ranging from inexpensive entry-level products to premium offerings, with distribution methods ranging from purely digital to face-to-face enabled. The price advantage of telematics has alternatives.

• Insurance prices remain reasonable (less than €700/year on average), moderated by a fairly low average mileage, limiting the attractiveness of telematics based discounts.

• Insurers generally believe that traditional pricing variables are sufficiently relevant (and the combined ratio sufficiently low) that they do not feel compelled to explore further sophistication.

For example, Direct Assurance launched their YouDrive telematic programme for young drivers in 2015. They had a total portfolio of 50,000 live contracts by the end of 2022, on the eve of expanding the offer to all drivers. By the end of 2024, the portfolio is around 70,000 contracts. This growth is not disgraceful, but it is not a tidal wave either, in a market of about 45 million vehicles.

Triggering the perfect storm

The insurance dynamic of telematics lies, in reality, in risk selection: insurers keep their same segmentation and apply a behavioral score to the nominal rate, in the form of a price reduction or increase. The insurer therefore seeks to attract, retain or discourage prospects and customers, based on behavioral data.

• By selecting drivers with good behavior, the insurer hopes to see the level of pure premiums drop in a given segment.

• Symmetrically, the aim is to weed out risks with less favorable scores in order to amplify the decline in pure premiums.

• These “less favorable” risks then fall back on non-telematic insurers who do not practice such selection.

• By doing so, these same insurers see the proportion of “less favorable” risks increase, which degrades their pricing and further encourages the flight of their “good” risks.

And so it goes.

In my opinion, the shift in the market triggered by telematics lies in increased selectivity: not by offering ever-greater discounts to those with good scores, but by penalizing those with poor scores. The resulting “eviction effect” of poor scores increases the price gap in favor of telematics insurers, thereby accelerating the movement of policyholders.

This is my interpretation of what is currently happening in the US market, with a player such as Progressive, that claims to increase the nominal rate by up to 60% (while limiting the discount to 45% - as communicated in 2023). The introduction of surcharges has been gradual over several years, revealing an acceleration in the penetration of telematics in recent years. The inflation of insurance premiums in recent years has probably helped the movement by allowing a larger price difference to be displayed in favor of telematics.

The technical results are there, and most major US insurers are now offering telematics to prevent competition from skimming their portfolios.

How do we move from lethargy to the telematics shift?

I think it is important to highlight an indirect effect of telematics on how it affects insurers underwriting policies: in a traditional market, pooling takes place within each segment, where “good” risks subsidize “bad” risks to a certain extent. Telematics deviates from this logic by favoring pooling based on behavior rather than static risk characteristics (location, demographics, etc.). When the market is dominated by mutual insurance companies — where solidarity between “lucky” and “unlucky” members is a dominant value — this so-called non-inclusive approach can face strong industry opposition. This is my understanding of the inertia of certain markets, such as France, where mutual insurance companies play a dominant role.

This brings us back to our chicken-and-egg question: if tier-1 insurers are not prepared to be more radical, how can we satisfy the growing demand for insurance that takes into account each individual's intrinsic risk?

• Evangelization: a first step could be to focus on non-tariff related telematic services, such as eco-driving scoring, claims management (accident detection, collection of claims-related data), etc.

• Selectivity: when considering telematics, addressing the "eviction effect" by penalizing bad behavior is an important factor in widening the price gap in favor of telematics and enhancing its appeal.

• Time: telematics insurance offerings must reach a critical mass for the dynamic to take effect — it took more than 10 years to gain real visibility in the United States.

• Fleets: many of the obstacles that can dampen the enthusiasm of personal lines insurers do not apply to fleets. Here too, the US market — with its specific characteristics — shows that this route may be relevant.

• Embedded: the combination of telematics and embedded insurance could offer another opportunity for car manufacturers to engage with their clients… and act as gatekeepers of in-car data.

There are different routes leading to success with telematics. What works in certain countries doesn’t necessarily apply to others. That’s not because one route doesn’t work in one country that it couldn’t be fit for others. It is up to the pioneers - whoever they are - to explore and evangelize their markets!