Insurers should tread carefully during telematics gold rush
Could telematic data mining turn out to be a regulatory minefield for insurers collecting information on policyholders in real time?
Could telematic data mining turn out to be a regulatory minefield for insurers collecting information on policyholders in real time?
While data has always been the lifeblood of insurance, the property-casualty industry of late has benefited from infusions of new types of information, mostly thanks to the expanding Internet of Things (IoT).
But as insurers race to capitalize on this telematics gold rush, the risks involved in mining and refining emerging data sources for underwriting, pricing, claims, and marketing may create some significant speed bumps.
That was one of the key takeaways at the recent symposium, “Next Gen Analytics and IoT: Powering InsurTech,” organized by the Center for Executive Education at St. John’s University in New York City. Opportunities to monitor and analyze the actual experience, behavior, and preferences of policyholders are rapidly multiplying, thanks to the proliferation of sensors in vehicles, homes, and businesses, as well as on individuals (via wearables).
Questions persist
The use (and potential for misuse) of personal information shared online is very much in the news these days. Insurers may assume they are largely immune to such concerns in their telematic programs, given that consumers have always readily provided a plethora of data to carriers in exchange for coverage or claims payments. What may prompt concern, however, is how the industry goes about translating all the granular data it is now collecting via sensors to justify pricing and claims decisions with the help of increasingly sophisticated analytics and predictive models.
During the symposium, insurers were urged to beware of a number of regulatory challenges that could arise as the industry scoops up the digital bread crumbs consumers are increasingly leaving in their wake. Among the questions raised during the event for insurers to ponder:
- Are policyholders fully aware of the many kinds of personal data being collected telematically, and do they completely understand how that new information is being utilized by insurers?
- Is all this new data being leveraged appropriately to underwrite and price policies, as well as settle claims?
- How might insurers explain and justify their decisions based on these new data and models to regulators and policyholders?
- Who ultimately owns and determines the use of IoT data generated by policyholders?
Regulators at the symposium made clear they don’t have all the answers, but expect to start asking more probing questions along these lines, making sure the new IoT tools and techniques being deployed don’t end up doing policyholders more harm than good.
Determining best practices
Greater disclosure was cited during the symposium as a possible antidote for many of the potential concerns raised about insurer use of telematic data. But the industry was also warned that disclosure alone is not necessarily a panacea. Is the disclosure comprehensive? More importantly, is it comprehensible to policyholders and regulators? During breaks, a number of attendees speculated that insurers may not be able to simply disclose their way around this problem. Instead, they may need to be more transparent in explaining exactly how IoT data is being used, and point out tangible benefits for consumers.
Predictive models based on mysterious algorithms analyzing alternative data may appear to be an impenetrable black box to “civilians” — those outside the industry. Consumer advocates and regulators are therefore likely to want a closer look, as well as see certifiable research demonstrating why real-time data is superior in terms of risk assessment than the more static (and less intrusive) information that’s been provided up to now. Exactly how do these new telematics correlations play out?
For example, are drivers found to be stopping short more often than average actually at greater risk of getting into accidents? While this might sound intuitive, is the connection still just a hypothesis, or is there hard evidence to prove that assumption?
The role of insurance consumers
On the other hand, a number of industry speakers pointed out that insurance underwriting and pricing have always been something of an enigma to policyholders, but thanks to telematics, consumers are now being judged on logical factors they can actually control. Some suggested that telematics data generated by real time monitoring seems inherently more defensible, transparent, and fair than depending on some of the proxy data (such as credit history) historically cited by many insurers for their decisions. At least with telematics, pricing is set according to how a person actually drives.
Consumers also need to be made aware of the many potential side benefits to collecting telematics data, symposium speakers suggested. In auto insurance, the biggest benefit might be improved public safety, since policyholders are expected to drive more carefully if they know they are being monitored (and that how much they pay in premiums could be on the line), while receiving valuable feedback on their driving habits and warnings about hazards in real time.
Indeed, there’s likely much to be gained by policyholders having insurers as a ‘back seat driver’ if it helps avoid accidents and save lives as well as money. The same might be said for having an insurer monitor one’s home, business, or very person (thanks to wearables). ‘Big Brother’ may not be so bad after all, as long as both parties — those being monitored as well as those doing the monitoring — are clear about what’s being watched and why it’s mutually beneficial in a world where ‘privacy’ is becoming relative and personal data is an increasingly fungible asset.
Sam J. Friedman (samfriedman@deloitte.com) is insurance research leader with Deloitte’s Center for Financial Services in New York. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn. These opinions are his own.
See also:
8 ways telematics will shape insurance agencies in 2017