Information such as the time of day, day of the week driven, location driven and speed—much of which is available through GPS and the smartphone—has proven to be the most predictive. Carriers are using this model to infer driving patterns from location-based analysis. GPS devices collect fewer low-value variables than telematics devices do; there is less data to store and interpret.

But for midsize insurers that often have limited resources, telematics is a complex and costly solution. Adopting telematics is a time-consuming process: It can take a year or more to implement and up to five years to see actual results.

Further, once telematics tools are  utilized, there are additional challenges including transmitting, storing, scrubbing and analyzing the vast quantities of data collected—an area in which few insurers boast any expertise.

The continuous and ongoing nature of the data makes capture and storage a difficult management problem. In addition, midsize insurers do not always have the resources to develop, test or market the numerous policy models that large insurance companies do. The amount of data to sort through makes it increasingly difficult to figure out what's predictive and what's not.

And beyond the technology costs, there are also other potential issues. Some customers who are very good risks may not want the black box in their cars. And if this is the only way those customers can get the best pricing, there can be a disconnect. Large carriers may view this as a cost of doing business. But for midsize carriers, where strong insured relationships are part of their brand, there is a risk of alienating drivers with a one-size-fits-all telematics program.

Midsize Personal Auto carriers are facing an increasingly competitive market—one that is likely to continue to change rapidly. While some may be feeling pressure to implement telematics, there are other options to consider. In fact, many leading players are using new technology and other solutions to more accurately price their risks. These carriers are leveling the playing field with large carriers that rely on discounts to attract the best risks.

One thing is clear: The market is moving fast, and it is important for midsize carriers to develop plans now to combat adverse selection and move forward quickly.