Innovating commercial auto distribution through telematics
New tools are enabling insurers to enhance the profitability of their commercial auto business through risk pre-selection.
Innovation in both product and distribution underlies the strength of successful insurance programs, and commercial auto insurers have an opportunity to leverage both as the industry seeks to improve upon a decade of financial losses. While the use of telematics-based products increases, most insurers adopting them remain committed to traditional distribution methods and overlook the substantial benefit of risk pre-selection.
Commercial auto is the worst-performing property and casualty line of business, and telematics is a very necessary solution for advancing risk assessment and future profitability. Since 2010, the industry has generated an underwriting return only once, in 2021, due to a marked decline in frequency associated with the Covid-19 pandemic. As such, an increasing number of insurers are transitioning to telematics-based programs based on quantified improvements in crash frequency, loss ratio, retention, claim quality and efficiency. The IoT Insurance Observatory is a leading advocate for telematics solutions in both personal and commercial lines and reports many of these results.
The typical implementation of a telematics program for an insurer involves the adoption of the relevant technology, collection of telematics data and product redesign to include telematics rating factors. Progressive, the leader in telematics advancement since 1996, has confirmed telematics is their most predictive rating factor, as have other actuarial analyses, so the product benefit is well established.
Using traditional distribution methods, however, insurers have yet to fully leverage the risk pre-selection value of telematics data. Insurers typically offer a telematics program through both their agency and direct distribution channels as a policy option along with an initial policy term participation discount. Once sufficient telematics data is collected and assessed from the initial policy term, the telematics risk scoring is reflected in the renewal pricing.
Insurers have an opportunity to further enhance the value of telematics data by expanding their distribution to include fleet management software providers. Fleet management software providers are already capturing telematics data, which eliminates a common point of friction associated with the insurer’s request to collect it, and software providers already have valuable customer relationships with fleets.
Since market penetration of telematics-based commercial insurance is still quite low, these partnerships can generate a win-win-win solution. Insurers can gain access to targeted fleets usually at a lower acquisition cost, fleet managers improve customer service and retention and develop incremental revenue (based on marketing fees paid by the insurer), and fleets gain access to more competitive insurance options based on their safety. A handful of partnerships have recently developed, but these are just cross-sell-based, allowing each marketing rights to the other’s customers.
With appropriate data sharing permissions established between a fleet management software provider and their fleet customers, insurers have an opportunity to curate the optimal portfolio by pre-selecting risks using key data owned by the software provider: vehicle class, geography, business class, mileage and telematics. This innovative model allows the insurer to improve profitability by selecting only those risks that meet their telematics thresholds and their favored vehicle classes, geographies and business classes. Since each insurer’s pricing algorithm is unique, they typically target specific vehicle classes, geographies and business classes to expand, subject to a targeted measure of profitability. Meeting these business objectives is possible through risk pre-selection.
For example, if an insurer establishes a business plan to write a targeted amount of direct written premium in their top five states among their top ten business classes, these prospective policyholders can be directly accessed through a fleet management software partner. Such a partnership leverages the provider’s existing customer base and ability to source additional “insurance eligible” classes, typically at a fraction of traditional insurance acquisition costs.
The commercial auto insurance market has suffered from a lack of pricing consistency and profitability over the past decade, and telematics-based products are key to restoring both measures of market success. By expanding their distribution to include fleet management software providers, innovative insurers have the opportunity to enhance the profitability of their commercial auto new business through risk pre-selection.
Joe DiMartino, Ph.D., is CEO of Fleetr, a fleet management insurtech that leverages telematics and innovative distribution to build profitable commercial auto solutions for insurers. Contact him at jdimartino@fleetr.com. Opinions expressed are the author’s.
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