By Kwami AHIABENU II
Insurance ensures risk mitigation. The history of insurance dates back thousands of years with its origin in risk-sharing and mutual aid. In recent years technology is impacting all aspects of our society and insurance is not an exception. The Insurtech market is awash with a lot of products and services with personalization being the driving force. One of the innovative insurance products is known as insurance telematics which is premised on a usage-based insurance approach.
This includes packages like Pay-As-You-Drive (PAYD), Pay-How-You-Drive (PHYD) and Pay-Per-Trip (PPT) auto insurance. These sorts of insurance premiums are not fixed such as an annual or monthly amount but consist of a flexible amount. The global market for insurance telematics is estimated at US$3 Billion in the year 2022, projected value of US$13.1 Billion by 2030, growing at a Compound annual growth rate (CAGR) of 20percent over the analysis period 2022-2030 (ResearchAndMarkets.com).
Traditional insurance is based on an actuarial risk model which relies mainly on historical data and statistical analysis to assess risk. The ability to collect large datasets of past insurance claims, user information, demographics and other relevant data is key to the success of actuarial computation of premiums.
The telematics risk model is a method used by insurance companies to assess the risk associated with individual drivers based on real time data collected from telematics devices or mobile apps installed in vehicles.
There are 5 steps in the actualization of telematics risk models including data collection, data analysis, risk assessment, premium calculation, feedback, and incentives. Telematics technology allows insurers to gather detailed information about driving behaviour, such as speed, acceleration, braking patterns, location, duration, and the time of day the driving takes place.
Therefore, in the telematics insurance risk model, a flexible amount is paid as an insurance premium; determined based on data points such as vehicle usage as a function of time, place and behaviours. If a user drives their car for 100 miles in a month, all factors constant, they will pay less when they drive their car for 1,000 miles within the same period. Also, drivers who demonstrate safer driving habits are rewarded with lower insurance premiums or significant discounts just like in traditional insurance schemes.
Insurance telematics works by collecting, measuring, and transmitting data points using a GPS-based device installed in the vehicle. The system collects data by monitoring the vehicle using mileage, braking, and acceleration which serve as the basis of usage-based insurance (UBI).
The main benefit of insurance telematics is the offer of a usage-based premium as opposed to a fixed premium, which allows a driver who only uses the vehicle for short rides on weekends, to pay a lower premium than they would have paid with a traditional cover. Further, insurance telematics leads to accurate pricing since price premiums reflect the actual risks being insured. The use of insurance telematics provides a huge data source for insurance companies to calculate premiums in relation to risks thereby ensuring the premium covers only related exposure.
Calculation of premiums can be a long difficult and complex process, with the introduction of insurance telematics, insurers gain a lot of efficiency due to the automation of hitherto manual and time-intensive work streams. Another important advantage of telematic insurance is that it provides real-time data including real-time accident notification which can be promptly used to establish claims liability as well as the provision of data to ensure increased speed of processing.
Telematics insurance is giving rise to new product development and customization providing a more personalised and better user experience. However, a key challenge of telematic insurance is privacy and data security. The system works on collecting and transmitting detailed personal information about driver behaviours and habits, which could be damaging if it falls into the wrong hands and is used inappropriately. Therefore, serious consideration should be given to security and privacy safeguards to protect individuals who opt to participate in telematic insurance.
Several business and firms are to the establishment of numerous Telematics Service providers (TSPs) offering numerous services including relevant software, data analytics, hardware manufacturers, navigation, and map providers. Beyond the provision of services to insurance companies, TSPs also offer fleet management services for fleet operators to monitor vehicles and drivers based on subscription fee.
In conclusion, Insurtech is enabling several innovations in the insurance sector with a telematics risk model offering a unique opportunity for insurance to offer more dynamic pricing and personalized experience based on real-time data. Although the telematic risk model offers a lot of advantages to insurance companies and benefits to users, significant strategies must be put in place to mitigate privacy and security concerns if it will achieve widespread acceptance.
>>>The writer is a Tech Innovations Consultant. He can be reached via [email protected]
