Telematics has been around for years, but has been slow to catch on among MENA insurers. Is it just another newfangled technology, or an innovation that warrants a closer look?
In June, Qatar Insurance Company (QIC) announced its plan to pilot a telematics solution to assess drivers’ behaviour, which will eventually be used as a basis to develop new pay-how-you-drive (PHYD) insurance plans.
The pilot is believed to be the first of its kind in the Gulf. Although telematics has been around for years, it has been slow to catch on among insurers in the region, and emerging markets in general. But what really is telematics, and what is in it for insurance companies?
Telematics defined
The word “telematics” comes from the German word “telematik”, a hybrid of telekommunikation (telecommunication) and informatik (information science). SAS defines it as “the use of wireless devices to transmit data in real time back to an organisation. The data recorded in telematics devices can be used to develop more accurate pricing, improve the granularity of risk management techniques and reduce losses by enabling better claims assessments.”
Telematics is not new. US carrier Progressive Insurance launched the first telematics product in 1998 and by 2012, reported over US$1 billion in premiums for such policies. By 2020, says SAS, over a quarter of all US auto insurance premium income will be generated via telematics, representing more than $30 billion.
In Europe, which has become the most important market for the technology, there were more than a million telematics-based insurance customers by the end of 2011, says SAS. And the expansion of telematics into emerging markets is “inevitable”, predicts the software company.
Telematics in motor insurance
Telematics can be used in life insurance to better gauge the cost of an accidental death benefit rider, while in health insurance, sensor-based technology helps to monitor a policyholder’s health, says Capgemini. However, it is in motor that telematics usage-based insurance (UBI) has been most prevalent so far.
In motor, there are two main types of telematics UBI products: pay-as-you-drive (PAYD), and PHYD. In PAYD, a GPS device installed in the car tracks the distance driven and automatically transmits the information to the insurer. PHYD is more sophisticated, using the GPS devices with integrated accelerometers to track a multitude of factors: mileage, date, time, location, speed, cornering, harsh braking and even frequent lane-changing.
What this means is that the more you drive, the more you pay; and if you drive late at night you pay more than if you drive in the day. Hence, by offering telematics devices to policyholders, an insurer could empower customers and reward “good” drivers with cheaper premiums. In this way, insurers could also retain “good” customers and avoid the “bad” drivers, who may look elsewhere for coverage.
In the QIC pilot, participating vehicles will be equipped with in-vehicle devices collecting data such as harsh acceleration and deceleration, over-speeding and distance driven. All these factors will be used by a cloud-based system to compute a driver scorecard, where drivers can be compared and ranked. Such information, especially if coupled with proper incentives, can influence the driving behaviour and have a significant impact on road safety, said QIC in a statement.
Evolution in technology drives costs down
When telematics first surfaced over a decade ago, development costs were high. This was a key factor behind Norwich Union’s move to scrap its PAYD policy in 2008, just two years after its launch. The decision of the UK insurer, now known as Aviva, to subsidise the costs of in-vehicle units ultimately did in their PAYD scheme.
Today, however, insurers have begun offering “self-install” devices and smartphone apps, which are cheaper to develop. An app, for example, costs an insurer approximately GBP20 ($34) per download if distributed widely, says a Telegraph report. And with integrated telematics for new cars expected to reach 88% by 2025 globally, this is expected to drive down device costs for insurers, says Capgemini.
There is another benefit of using apps. “The increasing number of smartphone apps, including ‘try before you buy’ options that are becoming available, are helping with consumer understanding,” says Mr Peter Lee, Director at Towers Watson.
The Qatar pilot will introduce a portfolio of telematics devices at different cost levels for different use cases, says Dr Adnan Abu-Dayya, Executive Director and CEO of the Qatar Mobility Innovations Center (QMIC), which has partnered QIC. “We have a strategy to use a combination of dedicated telematics devices and smartphone applications. We believe each has a role to play.”
Operational challenges
Smartphone-based telematics has its downside, too. “A lack of standardisation in data and auto platforms makes it challenging for insurers to integrate mobile devices into their IT infrastructure,” says a Cognizant report. In addition, “mobile devices are a potential distraction, as drivers use them for calls and texting while driving, which is a major cause of accidents. Also, insurers need to authenticate whether the mobile device was indeed in the vehicle at the time of driving”.
There are many other factors beyond the insurer’s control, says Cognizant. These include whether the driver is carrying his or her phone while driving, whether the device is not being carried by someone else, whether the smartphone is charged and whether the relevant insurance apps are running. “Smartphone devices are not as rugged, secure or reliable as embedded onboard devices, and they open up greater opportunity for device tampering, lowering insurer trust in the data generated by these devices,” it adds.
Progress in big data analytics may help insurers effectively use the data captured by telematics devices. However, insurers are often overwhelmed by the storage and analysis of the massive amounts of data generated by telematics, notes Cognizant. “Also, UBI projects are extremely complex in nature, requiring extensive data management and analytics capabilities.”
Data privacy
One issue that has arisen in the West is customers’ right to privacy. Because the monitoring equipment tracks not only mileage but also people’s location, driving behaviour and other private information, there are concerns about the “Big Brother” effect of telematics UBI.
In the MENA region however, the Western concept of “privacy” is relatively new. There are no pan-GCC or pan-Arab laws governing data protection and privacy. Nor are there any specific national laws or regulators governing data protection and privacy in Qatar, Saudi Arabia and the UAE of the type found in European Union jurisdictions, says Latham & Watkins.
The law firm notes however that the constitutions of Qatar, Saudi Arabia and the UAE, together with certain statutes, recognise an individual right to privacy in specific circumstances. In addition, the Dubai Healthcare City, the Dubai International Financial Centre (DIFC) and the Qatar Financial Centre (QFC) have enacted data protection laws for organisations operating within their specific jurisdictions.
Telematics in MENA
While telematics has been deployed in Europe and the US for years, insurers in emerging markets are in general still cool to the technology. “The maturity of individual insurance markets is a factor, but I would say that alongside the barrier of concerns about the cost of technology and its reliability, insurers have found implementing telematics harder than they anticipated,” says Mr Lee of Towers Watson, which has been involved in more than 40 telematics projects globally over the last three years.
He adds that in emerging insurance markets, “a lot of the activity is currently concentrated in Asia, where there is significant activity in China and pilots being launched in countries such as Thailand”.
Apart from QIC, it is believed that no other MENA-based insurer is planning to pilot or implement telematics UBI, while Israel’s Clal Insurance is currently the only known company in the region with a PAYD scheme.
Multinationals like Allianz and RSA who have successfully deployed telematics solutions in developed markets have yet to replicate these in their MENA operations; this is sometimes due to local needs, strategies and regulations. At AXA for example, these products have been confined to Europe so far. “For almost two years now, AXA Italy, AXA Ireland and AXA Switzerland have been using telematics to better understand driving behaviours and reward good drivers with better rates. The data provided by customers while driving is analysed and will impact at the time of the renewal the premium paid by the customer,” says Mr Alexis de Beauregard, Chief Officer - Marketing and Retail Product Offering with AXA Insurance (Gulf).
“In the Gulf, telematics is not used yet by insurers, but we are considering launching an app in the very near future in a fun and interactive way before linking it to the tariff of our customers. This will improve our customer experience, enabling us to accurately price their insurance policies and ultimately give great discounts to good drivers. This will also support the market trend initiated by public authorities to promote safe driving. We are currently reviewing the functionalities of such an app to be able to launch it soon.”
There are a few factors needed for telematics UBI to take off in the region, says Dr Abu-Dayya of QMIC. “To make progress in the region, indigenous innovative solutions optimised for local market dynamics and complexities are needed, and a total technology-business partnership approach coupled with a clear focus on national road safety objectives are necessary. This is fully reflected in the nature and scope of the partnership recently signed by QMIC and QIC.”
Learning points for insurers
One of the key learning points for insurers is that an early start to innovation does help. “We see that the initial experimentation by insurers set them on the right path, even if projects were shelved until market conditions caught up or technology costs came down,” says a report by KPMG UK.
The biggest take-away for insurers, the report adds, may be to build R&D units and form partnerships with tech firms or joint ventures with manufacturers to explore the opportunities and pitfalls of new technologies. Industry observers believe that these partnerships – between insurers and motor manufacturers – could be the key to taking telematics into the mass market in the long term.
For insurers who have yet to do so, it is still not too late to test-drive telematics.