Linden Holliday, CEO of MyDrive Solutions, explains that early adopters of this new technology need to be fully aware of the range and limitations of those products that are first to market.

What is insurance telematics?

Insurance telematics is the process by which data is collected and analysed to enable driver behaviour to be assessed, and the level of risk presented by each individual to be calculated.

This allows an insurance company to assess individual risk much more accurately and therefore provide a much fairer price to the proposer.

Why has it become important now?

Telematics in the car insurance industry has now become a practical option through the reduction in the base price of the technology for in-car monitoring.

Secondly, legislative changes are increasingly impacting the industry. The European Court of Justice’s gender ruling in March means that from December 2011, car insurance companies will lose the ability to price differentially when it comes to gender.

For example, the current average first time driver insurance policy for a 17-year old male who has just passed his test is £4,400. His female counterpart can be insured for the first year at an average cost of £2700.*

As of next year however, car insurers will no longer be able to price car insurance premiums based on the gender of the individual driver. There is also a possibility that car insurance companies will soon lose the ability to differentiate by age.

As such, car insurers need a different means by which to assess risk and price insurance premiums accordingly, and through the analysis of behavioural data driven by insurance telematics, this has now become entirely possible.

Why is the direction that the industry is currently taking fundamentally flawed?

Early arrivals in this market place are balancing the available technology and the bandwidth – the ability to transfer data from the car to a server via the telecoms network

Providers have tried to minimise the amount of data that must be collected in order to make a prediction on driver ability.

The first suppliers to market have opted for low volume transmission of data – sampling typically every 30 seconds and additionally, exceptional events. We believe this rate of sampling is too low to enable a true picture of the driver’s behaviour to be established, and the exceptions themselves are typically set at an arbitrary level by the insurer, with no objective basis for determining what a true exceptional driving manoeuvre is.

The currently available “pay how you drive” propositions are somewhat better than the current proxies that car insurers are using to price risk. However, going down the 30 second logging, exception-based route will never lead to true understanding of individual driver behaviour.

One second data logging

It is possible to measure driving behaviour at a much more granular level using one second data logging.

The amount of data collected is significantly larger than that gathered by using the exception-based approach, and if done correctly, the increase in data will not swamp IT resources.

This results in a much more accurate view of driving behaviour, and therefore risk.

This allows the car insurance company to provide a more detailed assessment of the risk presented, and importantly gives the driver the information required to understand how they drive, and to work on improvements as necessary.

Furthermore, a more frequent measurement allows the company to see many more discrete behaviours, some of which might be missed by 30 second logging.

Contextualising driver behaviour

Knowledge of driving behaviour is of little value when it cannot be related to the location of the individual and the type of roads on which he is driving. Indeed, the value of driving behaviour can only be truly derived when it is contextualised to the underlying road network.

Using GPS data allows car insurers to analyse what type of roads their drivers are most likely to spend time on, and thus assess the associated risk they present.

A driver who spends the majority of time driving on motorways, for instance, is in fact around six times less likely to have an accident than a driver spending the same amount of time on open rural roads, whereas a driver who consistently spends time on the road after 11pm is approximately three times more likely to have a fatal accident than a driver who simply uses his car to commute in daylight hours.

Without the ability to relate this wealth of information back to the actual driving behaviour that has been recorded, how is the car insurer to assess the level of risk presented to him?

It is important that driving behaviour is always contextualised in relation to the road network, and specifically, the time of driving and the location of the car (which itself allows the insurer to understand exactly what hazards (roundabouts, junctions, bends etc) the driver is negotiating, and with what level of competence. Only by the utilisation of GPS data and cross referencing to the map can this be done effectively.

Conclusion

With the advent of insurance telematics the possibilities have rapidly opened up to allow car insurers to treat each of their drivers as the individual that they are, rather than merely as averaged pools.

However, early adopters of the technology are frantically trying to minimise the amount of data that has to be collected to make an accurate assessment of the actual risk presented by using 30 second data logging. This will never lead to true understanding of individual driver behaviour.

If car insurance companies do wish to drill down into the data to such a level that they understand the risk presented by each individual driver; they must pull together a number of capabilities.

These include behavioural data as derived by a minimum of one second logging, geographical data as determined by GPS data, and psychological expertise to assess why drivers behave in the manner that they do on the road.

Until all of these criteria have been brought together and analysed as a complete picture, we don’t believe car insurance companies will be able to understand the risk presented by individual drivers.

* As reported on BBC News, “Insurance and pension costs hit by ECJ gender ruling,” 1st March 2011- http://www.bbc.co.uk/news/business-12606610