Telematics promises to be a game changer in the Canadian auto insurance industry, but it’s early days and challenges abound. In the second of a two-part series, Brendan McNally reports.
The good and bad in data portability
Such degree of data portability makes Canada one of the most advanced UBI markets in the world, but it also makes it one of the most difficult markets for UBI insurers to make money on.
This is because drivers and insurers are attracted to UBI for nearly opposite reasons.
Insurers use telematics as an easy way to tell good drivers from bad, to make processing claims easier, faster and more accurate, while making claims fraud much more difficult.
Telematics also makes it possible to engage customers and deepen the relationship with them by offering them pricier, value-added services, ranging from predicting breakdowns before they happen to simplifying emergency roadside assistance.
The problem, however, is that drivers are attracted to UBI programs primarily as a way of spending less, not more money.
Many are opting for UBI simply to save money. And since they have access to their driving performance data, there is nothing stopping them from using it to shop for a better deal with another carrier.
To compound all this, according to the laws in Ontario and Quebec, the cost of the telematics device, as well as the costs of its installation and operation, must be borne by the carrier and not charged to the customer.
Mitigating hardware costs
John Ilias, manager – portfolio analytics, corporate underwriting & risk management at
“You’re starting up a program, buying devices, let’s say $200 a device, then adding an ongoing monthly operating cost, let’s say $5-$10 a month. That’s the upfront cost. Then, on top of it, you’re offering a discount. So now you’re undercutting your insurance costs. What you have to propose and show to the board of directors, or whoever, is that, in the longer term, you can obtain a ten-point reduction in underwriting costs that should offset the program costs.”
Insurance companies might save on hardware costs with UBI-based smartphone apps. But these have yet to gain much traction in Canada because the cost of using smartphones is much higher than in the United States, and unlimited data plans, which are relatively common south of the Canadian border, are scarce.
“I don’t think, in Canada, we’re ready yet for the device on a smartphone, simply because a smartphone is a play where you’re using a customer’s data [plan],” Ilias says. “The data costs in Canada are pretty expensive.”
As a result, most Canadian UBI systems are working with OBD2 dongles, at least for the time being.
Looking ahead with UBI
Although UBI marks the entry of telematics into the individual consumer market, Ilias doubts UBI-only programs will ever capture more than about 5-10% of the marketplace.
In the long run, UBI’s most enduring market will probably be with parents of teenage drivers who want to keep an eye on their children’s driving. Another, smaller market will probably be with adult children of older drivers whose driving behavior now requires some discrete scrutiny.
Ultimately, UBI provides the basis for creating a relationship with a driver and then expanding it to include other telematics services. “Usage-based Insurance is a minor play,” Ilias says. “Major play for us is vehicle diagnostics because, every year, we’re spending millions of dollars on door unlocks, we’re spending hundreds of thousands of dollars, if not millions, on dispatching the incorrect vehicle. Say, if you call and say, ‘My vehicle is broken down,’ and we [send] a BMW 70, and you don’t want it towed, you want a flatbed. Well, if we have this information ahead of time, we’ll save money, we’ll get the right vehicle to the customer, and they’ll be satisfied on the first shot.”
The renewal test
Still, “the true test [of UBI] is going to be the first renewal,” Ilias adds. “We now have the data, and we can tell how that data and the user jibe. … If he can get all those discounts and max out at 25%, then he’ll tell all his friends.
“But we have to be concerned with the people who are going to have the negative experience: an accident or a ticket or two. … They come in expecting a discount and end up with a surcharge. What are they going to say? A lot of American insurance companies have the idea of ‘accident forgiveness,’ where they’ll sometime let one accident slide, without having it affect the rate. It might be useful to adopt something like this, just to keep them and motivate them to be better drivers.”
(For part I of the series, see Insurance telematics makes its intitial beachhead in Canada, part I.)
Brendan McNally is a regular contributor to TU.
For all the latest telematics trends, check out Telematics for Fleet Management Europe 2014 on March 12-13 in Amsterdam, The Netherlands, Content and Apps for Automotive Europe 2014 on April 8-9 in Munich, Germany, Insurance Telematics Europe 2014 on May 6-7 in London, Telematics India and South Asia 2014 on May 28-29 in Bangalore, India, Insurance Telematics Canada 2014 on May 28-29 in Toronto, Telematics Detroit 2014 on June 4-5 in Novi, Michigan, and Advanced Automotive Safety USA 2014 on July 8-9 in Novi, Michigan.
For exclusive telematics business analysis and insight, check out TU’s reports: Telematics Connectivity Strategies Report 2013, The Automotive HMI Report 2013, Insurance Telematics Report 2013 and Fleet & Asset Management Report 2012.