So called OBD-II based telematics – aka onboard diagnostics – are rudimentary and controversial, but they have the potential to reshape the usage based auto insurance market to reward good or infrequent low-risk drivers while charging other, more risk exposed drivers higher fees. At the moment usage based insurance, aka UBI, is the most popular service in the North American market, as vehicle owners can get so called ‘good driver’ discounts on insurance premiums, according to consultancy Frost & Sullivan. (See Consumers Will Commit Fraud for Cheaper Car Insurance and Ford, State Farm Offer Auto Insurance Based on Miles Driven)
UBI will be the biggest market segment in terms of revenue, fleet management will likely be the main growth driver, as more companies try to improve vehicle tracking and diagnosis – the main services around which fleet management solutions can be designed, F&S opines. There’s a privacy issue for personal users, however, since you are giving an insurance company access to your actual driving mileage and times in order to adjust your rates.
The study, Opportunity Analysis of Telematics in the North American Automotive Aftermarket, finds that the market had revenue of $160 million in 2013 and it estimates this to reach $1.6 billion by 2020. The segments covered include vehicle diagnosis, asset tracking, fleet management and UBI.
“Growth will primarily be driven by service revenue, as the installed base of plug-and-play OBD-II devices grows rapidly,” claims Frost & Sullivan Automotive & Transportation Senior Research Analyst Anuj Monga. “Over the next seven years, services such as personal asset tracking and vehicle diagnosis will gain traction and further propel the aftermarket.”
However, there are issues. The telematics aftermarket will have address the challenge posed by the smartphones, which are a low-cost alternative to OBD-II devices because they can be loaded with applications capable of performing basic telematics features.
Usage-based insurance, and more generally Insurance Telematics, have been shouldered with tremendous expectations. Most of those expectations have thus far fallen short of the hyped promises to disrupt private passenger auto insurance, bring lower rates and personalized pricing to many drivers, and encourage safer driving behaviors. Never has a technology missed so many supposed “tipping points.”
“At its basic, UBI is a segmentation and pricing strategy. UBI allows for additional data variables to be considered as part of the underwriting and pricing process. Intuitively, how, when and where a car is driven should matter. And they do. They matter more than credit and all other pricing variables in place today. They have interactions with age, marital status, and vehicle type, and likely negate violations, territory, and gender. The problem with using driving data for underwriting and pricing is that (1) driving data is not readily available and is hard to collect, (2) it takes a lot of data to know how to use it, and (3) the objectives of all the players flooding into the telematics ecosystem aren’t aligned.”