Lets take a look at the overall view of telematic technology and how it could change the insurance business.
What Is Telematics?

Telematics is a wireless communications system designed for the collection and dissemination of data. Applications include vehicle-based electronic systems, mobile telephony, vehicle tracking and positioning, online navigation and information services, and emergency assistance. Telematics is a compound word combining the words tele, meaning far, and matics, derived from informatics. (The general definition of informatics is the application of computer and statistical techniques to the management of information.) It describes the application of information and communications technologies and services, usually in direct combination.

And what does it have to do with insurance? Think of telematics as black box devices for automobiles that can record data regarding the use, location, and condition of a vehicle and then hand this data to insurance companies that may act on it. Imagine this simple scenario: Vehicle A data reveals it is driven 100 miles a week at speeds that never exceed 65 miles per hour. Data from vehicle B shows it is driven 300 miles a week at speeds up to 85 miles per hour. It doesnt take an actuary to calculate it might be less risky to insure vehicle A. Of course, there are those who would argue the faster driver is in fact the safer driver. OK, whatever. I think statistical analysis of the data will determine who the safer driver is. This is not an opinion poll.
Heres what Gartner has to say about telematics in a recent report: Telematics helps enable wireless connectivity between auto telecommunications applications and the insurers computers. This technology provides information regarding automobile servicing, maintenance, and driving habits. Insurers also can use telematics to aid in the rate approval process. It has the potential to change insurance coverage amounts, policy time periods, risk assessment criteria and ratings in near real time. However, in its study, Gartner categorized telematics as a Technology Trigger, an early emerging technology with five to 10 years before it reaches its Plateau of Productivity, or broad market acceptance.

Black Boxes

Before we get too far, I want to make it clear there really are four different flavors of black box devices for use in vehicles. The first three essentially are vehicle data recorders and, as such, are more nearly like what we generally think of as black boxes in aircraft (aircraft data recorders). There are trip-logging devices, passive GPS tracking devices, and crash-data recording devices. Trip-logging devices probably are all you need to keep your teenage son in line. They are relatively inexpensive and track basic data such as distance, speed, braking, and engine status. The data is available for download to a PDA or other computer. Passive GPS devices are somewhat more sophisticated and marginally more expensive. They record actual vehicle location for the reporting period. These are handy devices if you have a small fleet of vehicles and want to keep your drivers honest. The remaining (not real-time) devices are crash-data recorders. They deliver a snapshot of data at the time of an impact (typically including both before and after data). Most new air bags contain basic data recorders.

Pay as You Go

Current auto policy rates are based on statistical averages. My premiums are based on historical claims for individuals driving the same or similar vehicle in the same or similar environment and in the same age and demographic group. I end up paying for the idiot who regularly drives under the influence. I also end up having my premium reduced by being averaged in with Mr. Cautious, who never has exceeded the speed limit. The insurance company covers its risk by maintaining that average pool of premiums. Telematics offers the promise of real-time ratings. I stumble out of a bar at 3 a.m. and suddenly begin driving erratically at a high rate of speed. My insurance carrier theoretically could raise my premium on the spotor maybe even cancel coverage (that might be a bit dicey). This obviously is going to be an opt-in option, which raises an interesting question: Is the value derived from real-time coverage charges of more benefit to the insured or to the carrier? If the benefit is to the carrier, then how do you position the value proposition to the insured?

A less radical solution would be a true pay-as-you-go system. Rates could be based on statistical averages, but the insured would be charged only for miles really driven. I can imagine a hierarchy of rate schedules: one for my daily interstate commute, charged just for the miles (or is it time) I actually am commuting; I could have another rate for vacation travel on a variety of roads and locations where my vehicle has no history. Pay as you go is not necessarily an easy sale. At the present time, insureds are able to exaggerate their weekly or annual mileage in their favor. If I currently am reporting 12,000 miles a year to my insurance carrier but in reality driving 18,000, why would I sign up for pay as you go? Insurance could end up being like a lease, where you need to cough up all the excess mileage charges at termination. It sounds as if all those little old ladies who truly do drive no more than 20 miles a week to church and the grocery store would be the sole beneficiaries of such a program.

So, Who Pays?

What about the expense? Who is going to pay for these systems? Yes, a silly questionthe consumer always pays in the end. There are only about four-and-a-half million automobiles in the U.S. with OnStar or ATX systems installed. These devices easily can add $1,000 to the initial cost of the vehicle. Annual fees range from $350 to $1,000. Those fees are one reason second-year renewal rates are so low. Typically, consumers receive the first-year service with vehicle purchase but then need to pay for subsequent service themselves. Device costs certainly will drop as use becomes more widespread, but service costs will rise. Then there is the additional expense of integrating all this real-time data into carrier IT systems.

Another issue is privacy. We live in a paranoid society. In Ohio, mandatory Social Security numbers no longer are required on a drivers licensetoo many folks perceive such a universal identifier as a dangerous invasion of their privacy. The same or other people are convinced radio frequency identification systems will spell the end of personal freedoms. Others refuse to use grocery-store discount cards because, combined with bar-code scanners, their grocer can track all their purchases. Who cares? Get a life. If Kroger can make good use of the fact I purchased 342 boxes of mac and cheese last year, good for Kroger. I know an individual who refuses to use credit cards, not because of spending money he doesnt have, but because theyll know what I bought. I personally dont care whether my vehicle is tracked, but then I dont stop by the Hollywood Hustler entertainment store on my way home from work. Lets just say the insurance industry is going to have to offer some incredible discounts to get buy-in for telematic policies. These systems may never be accepted until they are the only game in town.

Not So Fast

OK, never mind me. These systems already are in place with a British insurer leading the way. Norwich Union is the seventh-largest insurer in the world, with a market share of 14 percent in the United Kingdom. In 2004, it introduced a pilot pay-as-you-drive system with 5,000 volunteer policyholders. Norwich Union chose IBM as its technology partner in this pilot. IBM provides the telematic architecture, hardware, software, and device specifications. One stated purpose is more accurate insurance premiums for motorists based on actual use of their car. More important, the Norwich/IBM pilot may offer the validation other carriers need to proceed. Why wouldnt an insurer want more relevant data on its insureds? From the carrier point of view, telematics is a no-brainer. From a consumers aspect, it is Big Brother. I dont see technology or cost issues dictating adoption of telematic policies. I expect earlier adoption among those insurers that have a closely controlled demographic of insureds. For the rest of us, telematics may be an emerging technology that never fully emerges.