Telematics in commercial fleets: a path to profitability

In the past five years, a clear and consistent pattern in commercial auto insurance — reported combined ratios exceeding 100 — has been having long-term, negative impacts on profitability for insurers and shareholders alike.

In truth, commercial vehicle and fleet insurance coverage has been exceptionally challenging for many insurers to manage over the past two decades.

Commercial auto insurers are now at a crossroads, and have many questions related to their respective portfolio management. Many are experiencing market challenges including those in portfolio profitability, customer retention, regulatory complexity, and sales channels. Should they pull back on commercial auto underwriting, which often can be a gateway to more profitable coverages such as property and liability? Do they wait out this period of "soft rates" and low investment returns, holding on to market share and instead taking opportunistic, incremental growth? Or is this a space that may be ripe for innovation?

Since 1995, the industry has recorded profitable combined ratios (values below 100) only eight times, according to the Insurance Information Institute, and half occurred during the most recent recession when commercial auto miles driven and demand for coverage plummeted. Aggregate net written premiums have recovered and surpassed prerecession totals. Even so, rates have remained low. Only recently have commercial auto insurers seen modest rate increases in the 1.5-to-2.5 percent range. Since 1995, the industry has recorded profitable combined ratios (values below 100) only eight times, according to the Insurance Information Institute

The optimal solution may already exist in the form of connected vehicles and fleets. While telematics may be relatively new to personal auto, commercial vehicles have been using the technology for more than 20 years typically to track sensitive cargo and provide logistics planning. One strategic advisory firm, estimates that there are more than 8.9 million connected commercial vehicles in the United States and that nearly 90 percent of all vehicles will be "connected" by 2020, according to research conducted by Ptolemus Consulting Group.

Mature models

Telematics service providers (TSPs) have mature business models to install and maintain various devices inside vehicles. These devices typically transmit driving behavior data back to their systems, where it's analyzed to provide fleet managers with guidance on improving fuel efficiency, diagnostic and prescriptive maintenance, and, perhaps most important, driver safety feedback and coaching. These facets can affect the total cost of ownership (TCO). Repurposing the same driving data for insurance underwriting purposes can be a natural extension and yet another way to lower TCO for businessowners and fleet managers.

There are potential benefits to all parties involved in telematics-based underwriting. It's no secret that commercial auto insurance can benefit from more enhanced risk segmentation for rating purposes. Vehicle operational data provides much more accurate risk profiles for proper pricing, which can positively impact rates for better-performing fleets. Because the driving data is portable, insurance companies can review driving behavior efficiently before the policy is bound, rather than binding coverage and reviewing performance after the fact. By actively monitoring their insureds' driving practices, insurers can engage positively with customers and promote safe driving through gamification, incentives, and other customer-focused benefits.

Businessowners and fleet managers can then obtain rates that more accurately reflect their employees' driving practices — further promoting safe behaviors, gamification of driving, and driver coaching, with analytics and tools to support those initiatives. Businesses that are already invested in safe driving can realize premium benefits at the inception of their policies, rather than a year later at renewal. Indirectly, safe driving habits have a net positive effect on fuel consumption and vehicle wear and tear, which lowers TCO and has implications for profitability.

Driving data: A new revenue stream

TSPs that manage the hardware and software that collects and transmits the data can add insurance savings to their list of value-added services, along with traditional products. With driver consent, TSPs can also potentially develop a new and organic revenue stream by harnessing driving data and transmitting it to insurance companies that wish to use telematics data for underwriting and rating. To achieve telematics insurance "harmony," both the insurance companies and TSPs would need to overcome contrasts in their business models. Today, there are dozens of TSP vendors and mobile-solution providers capable of capturing various forms of vehicle data, and there are hundreds of commercial auto insurers that may want such data. That's what's known as the many-to-many business challenge.

The ideal solution to achieve such "harmony" is a single point of access to aggregate and normalize fleet driving data to provide scalable solutions that can benefit all parties. Data must also be accessible in a timely and consistent format that allows insurers to integrate data from varied types of commercial vehicles and business uses. Insurance companies also need either a proprietary scoring model or a third-party model to evaluate the data.

A compatible response to this many-to-many business challenge would be a data platform capable of ingesting, analyzing, and distributing new and unique data points from connected vehicles, property, and even people, with speed and agility. This will keep insurers well equipped with innovative tools to help support underwriting decisions being made in a continually changing marketplace.

Zack Schmiesing is director of Thought Leadership, Commercial Lines Underwriting, for Verisk Insurance Solutions, a Verisk Analytics business. The opinions expressed here are his own.

This author can be reached by sending email to [email protected].

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