The Telematics Defense: Achieving Winning Outcomes with Usage-Based-Insurance.
By taking a little poetic license with an old adage from the world of competitive sports--that often the best offense is a good defense --we can also find a lesson that applies to auto insurance. For example, telematics has recently given insurers the ability to analyze policyholders' driving habits, including mileage, maneuvers, times of day, and locations.
While traditional rating attributes, such as credit scores or motor vehicle records, provide information analogous to the back of a baseball card, telematics effectively represents a leap to full-fledged scouting reports for each risk. This information is powerful, but its collection and use require heavy hardware and wireless communication costs.
As a result, until now, telematics has almost exclusively been the domain of self-insured large fleets and a few national insurers. However, executives at all companies need look only to their counterparts in the sports world--from boxing to football, hockey, or basketball--to see how telematics can be used defensively to obtain successful and surprising outcomes, regardless of company scope or specialty.
Rope a Dope
On Oct. 30, 1974, heavyweight champion George Foreman landed a barrage of crushing punches upon a seemingly overmatched Muhammad Ali. But in continuously falling back, Ali was using the ropes of the boxing ring to help absorb the brunt of Foreman's blows. Then Ali knocked out his opponent with a swift right in the eighth round. Such a strategy translates well to the telematics sphere.
The primary use of telematics by insurers to date has been to support discounts for drivers who demonstrate safe driving patterns, with the hope these risks will eventually produce lower loss ratios on an ongoing basis. Some insurers will initially have more capital to devote to telematics technology and resulting discounts than others.
However, a common data dilemma has temporarily leveled the playing field between insurers at different stages of the game. Given the technological costs of telematics, few insurers large or small are able to enroll enough policyholders in "usage-based insurance" to accrue databases required for rigorous statistical analyses.
As a result, organizations must rely on heuristic or judgmental approaches to determine appropriate discounts for less risky drivers. Certain behaviors intuitively result in reduced insurance losses--for example, low mileage or driving into less congested areas--but are likely to qualify a relatively low number of drivers for discounts. Therefore, insurers looking to attract a larger number of "safe drivers" with telematics must reach for higher hanging fruit--for example, vehicle maneuvers--with correspondingly less science to support correlations with loss. Consequently, there is no guarantee these discounts will be any more effective in attracting profitable business than Foreman's punches were in felling The Greatest, especially when insurance markets are less elastic than the ropes of a boxing ring.
The kicker is this: A relatively small investment in telematics--as little as one percent of an overall book, for example--may be just as effective as a larger one in identifying, discounting, and retaining one's best risks or perhaps even prying a handful away from competitors that are using no more sophisticated analytics. Retaining one of an insurer's most favorable risks using telematics may yield greater dividends than acquiring many more new risks of debatable profitability. When it comes to punches or strategic discounts, selectiveness and timing often trump quantity.
Change the Game
On Dec. 7, 2010, the New England Patriots dominated the New York Jets 45 to 3. One month later, the Jets ended the Patriots' season with a 28-to-21 playoff win. What changed? In the rematch, the Jets confused Patriots' quarterback Tom Brady by abandoning their trademark strategy of pressuring him in favor of pressuring and double-teaming his receivers instead. The lesson here is an important one for telematics: Success can be achieved without playing to one's core strengths.
To illustrate, "wholesale discounts" may have worked well for some insurers in the past, but such an approach may not be economically feasible combined with the large technological outlay required for telematics. Indeed, insurers must deal with an average technological cost of more than $100 per year for each telematics device they purchase or lease.
But as an alternative to pure discounting, a telematics infrastructure may enable an insurer to provide other value-added services to insureds at marginal additional cost. New or existing customers may value portals (to monitor teen or elderly drivers), roadside assistance, or stolen vehicle recovery even more than they would value financial discounts. Those services--which are grounded in the GPS and real-time reporting capabilities provided by telematics--may be offered complimentarily to build brand loyalty or may even serve as an ancillary source of revenue.
Where an insurer lacks expertise in these services, it may find willing partners in the fleet sector that are likewise looking to expand beyond their core competencies. In the end, insurers that once competed on price may find themselves competing on service, and vice versa.
Whether keeping competitors out of the end zone or one's preferred risk portfolio, it may be necessary to go beyond the traditional playbook to obtain desired results.
Witness Everyday Miracles
On Feb. 22, 1980, the U.S. Olympic hockey team defeated the defending gold medalist Soviet Union 4-3. During the decisive third period, U.S. coach Herb Brooks employed frequent player changes to maintain energy, thus holding the USSR scoreless while his squad notched the go-ahead goal. The transferable lesson here is a hands-on approach can eliminate easy scoring opportunities.
In auto insurance, costly "points" are scored every day in the form of fraudulent or avoidable claims and premium leakage. Telematics provides several key defenses. For starters, identifying risky behaviors and providing incentive or guidance to remediate them has the potential to stop accidents before they happen. This has produced positive results in the fleet sector.
A cost-reduction argument may also apply to dispatching emergency assistance and claims adjusters to the scene of accidents within a short period after a harsh maneuver is registered, which is possible due to the real-time capabilities of telematics. Taking seconds off of response time could literally translate to thousands of dollars in reduced medical costs or effort spent reconstructing the events of an accident.
Finally, although there are laws in some states governing the use of vehicle-generated data, the information collected using telematics could conceivably help to determine the events surrounding an accident with certitude, rendering litigation less relevant.
On the premium side, having agents suggest telematics for new business may reduce applications from those who would falsify their insuring characteristics such as estimated annual mileage, which is the insurance equivalent of an empty-net goal. The combined effects of these process enhancements may be enough to offset the costs of telematics technology entirely.
Like Brooks, whose numerous personnel shifts helped the U.S. outmaneuver its more experienced opposition, leaders at smaller organizations may be more nimble to effect changes of this nature because there are fewer layers of bureaucracy between themselves and "boots on the ground." An integrated loss prevention strategy based in telematics has the potential to effect incremental changes that may help differentiate financial success and failure.
Never Give Up
The number-one-ranked Houston Cougars were heavily favored to defeat Jim Valvano's North Carolina State Wolfpack in the 1983 NCAA basketball championship. But the Pack's defense kept the game close until senior Lorenzo Charles dunked home a rebound for a 54-52 win at the buzzer. The moral is as much psychological as operational: While it is possible to overcome time or resourcing deficits, you have to be in it to win it.
Some early innovators in the telematics space have acquired patents and publicity with their usage-based insurance breakthroughs but then did not bother to show up for "the game." Yet the game will go on regardless of who shows up, and in insurance, winners become champions on financial statements rather than scoreboards. Right now is a critical moment for insurers, because the industry is in the relatively early stages of competition vis-a-vis telematics. Eventually, as technology costs decrease, pioneers will be able to further capitalize on their early lead, and even the best defensive strategy may not be enough to protect latecomers' preferred risk customers from walking away for discounts.
Nevertheless, at present, only a handful of insurers have launched full-fledged usage-based programs, and a relatively small number of vehicles have enrolled. This makes now an ideal time for insurers to lace up their sneakers. For those that have not given serious thought to the idea of telematics, an obvious first play might be to initiate a pilot that outfits company cars with devices. That will allow programmers and analysts to become acquainted with a challenging new data stream and will also support internal loss control objectives. It truly is the first step to becoming an industry leader, as those presently considered to be leaders likely went through a similar experience for their own initiatives.
Charles' dunk would not be memorable had Valvano's defensive strategy not kept North Carolina within striking distance until the closing moments. In a similar spirit, insurers looking to make a winning play with telematics must enter the arena to make that play count.
Defense Wins Championships
Many of insurers' telematics-based initiatives to date may broadly equate to offensive-minded strategies to attract new business. While using a large technological investment to dole out discounts will do just that, it is arguable whether the resulting risks will become profitable and when. At the current economics, insurers must effect average combined ratio improvements on the order of 25 percent per enrolled risk to break even. Studies in the fleet sector suggest this is possible with active loss control, but an inundation strategy is still a risky play for all but the best financed insurers.
A defensive posture in the usage-based insurance space gives smaller and less experienced players the ability and agility to compete for the best risks with a more limited investment. And by building out telematics infrastructure, these companies establish flexibility to escalate their involvement strategically as market conditions change. The examples in this article suggest that a successful defensive game plan in sports or telematics is all about putting your team in position to deliver at the critical moment. That is how every great upset begins.
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|Publication:||Property and Casualty 360|
|Date:||Jul 26, 2012|
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