Telematics features regularly now in the business and technology media. And academic institutions are having their say too, examining its implications for insurance and vehicle markets. Yet all too often, the influence that telematics is having on insurance is underestimated. And it’s an influence that is not always positive. Insurers deploying telematics need to conduct thorough risk assessments, to understand the ethical landscape that their investment will encounter. Here are some features of that ethical landscape that will need to be weighed up.
Much more than underwriting
Telematics is often viewed through the lens of underwriting. It will certainly have an impact on underwriting, but it will also affect how claims and fraud systems are configured too. Indeed, in a ranking of impact, underwriting may come third.
And of course, telematics may be fitted to a vehicle, but that hasn’t stopped some insurers looking at how to use that data to understand more about the policyholder’s risk profile for life, health, household and travel insurance.
There is for example the motor insurer has said it intends to sell the insights generated by its telematics analytics, to life and health insurers. After all, they say, if the data points to a driver driving in a stressful manner, then why shouldn’t this be used by life and health underwriting?
What this adds up to is telematics as a insurer wide technology, not just one function, not just line of business.
A temporal earthquake
One key message that telematics has signalled to the insurance community is that the days of an annually renewed policy are limited. If you have daily, hourly, or even real time data streaming into your underwriting system, then the principle of adverse selection says that, “to be fair” on policyholders, their risk needs to be written on a daily, hourly, or even real time basis. At which point, what will the policyholder actually have been sold? It’s not insurance.
This atomisation of the insurance product (more here) has huge public policy implications, especially given the compulsory nature of motor third party cover in the UK and many other markets. And it’s important not to think of this as just a motor issue. The implications of health tracking devices on the life, health and protection markets will be even more profound.
This makes telematics, and its health tracking cousin, profoundly political technologies.
Not the only way to innovate
Telematics is often promoted as a digital technology that will revolutionise mobility for vulnerable or disadvantaged communities. It could well do so, but remember that digital is not the only source of such innovation.
Consider Motability, the scheme that converts disability benefit payments to lease payments, making it much easier for people with disabilities to lease a car. Its 600,000 vehicles make it Europe’s biggest fleet. Before Motability, people with disabilities often had real difficulties securing motor insurance for a vehicle they wanted to own. Together through the scheme however, they became part of a massive fleet policy that was able to negotiate competitive terms and excellent service from the UK motor market.
My point is that innovation can come in many different forms. Telematics is but one form.
The Long Term Impact
Telematics is about real time data. Each swerve or brake is recorded. Yet you must always consider its long term impact. Real time underwriting deconstructs the pooled insurance product and replaces it with individualised underwriting, the consequences of which could be profound.
Telematics will cause some premiums to rise and others to fall. Price volatility will thus replace price stability. Covers will be detachable, as well as attachable, depending on output from the telematics device. So by all means refer to its potential to reduce premiums, but always balance that with the potential for it to increase premiums. And by all means refer to the options it gives insureds from vulnerable communities, but always include the risks that they face in the same breath.
I should at this point mention that I was Head of Insurance and Risk for the Motability scheme for several years. From that and subsequent experiences, I would estimate that the impact of telematics on the options for insureds from vulnerable communities to be, in overall terms, more negative than positive.
Feedback with strings attached
The notion that telematics can give feedback to the policyholder on how they are driving, and how their car is behaving, is an established one. That feedback is invariably presented as one of the great benefits of telematics systems – give us your data and you’ll learn how to be a better driver, or how to better maintain your car.
Yet consider the implications of such data sharing. If becoming a better driver doesn’t come easily, or at all, then up goes the premium and down goes the cover. If you don’t maintain your car as well as the insurer thinks you should, then a huge question mark will hang over any claim that you might submit in the future. After all, why should lower risk drivers pay for your car’s inadequate maintenance? A policy’s ‘reasonable care’ clause will be utilised like never before.
Only as good as…
Remember that telematics may be the source of the data, but it is the analytics that interprets it for insurance decisions. Yet questions are being asked about how good some analytical systems actually are (more here). Consider the UK insurer Carrot, the quality of whose telematics has been causing all sorts of problems for some of its policyholders (more here).
Is it time then, before telematics becomes more widespread, for such systems to be given compulsory training and testing? (more here). Many countries require this of human decision makers in their insurance sectors. Why not the machines that are beginning to replace them?
Telematics influences price, but not as some might think
We know from the current pricing review that in retail GI markets like motor and household, it is not risk that determines the price of a policy, but more often, an understanding of what the policyholder might be willing to pay. So that telematics device will therefore not be streaming risk data to the insurer, but opportunity data. Where the policyholder shops, travels and socialises – these send vital clues to an underwriter using ‘willingness to pay’. And let’s not remember the value of those same clues to a claims director using ‘willingness to accept’ (more here).
The question of autonomy
Telematics and other such tracking devices are seen as the most effective way of tackling sources of poor risk. Yet you shouldn’t expect them to be confined to that segment for long. There’s a lot of insurance people keen to promulgate them across their entire motor portfolios. In doing so, they will have to find a way of overcoming the quite entrenched resistance to this from more mainstream policyholders.
How will this play out then? Will pricing tactics be used to leverage that expansion? It seems likely. There’s some interesting Swiss research being developed about the ethical issues this raises. Watch out for it.
Industry Code of Conduct?
In 2018, the Royal Society proposed that an industry code of conduct might be the best way of dealing with the data ethics questions raised by telematics. That seems unlikely. After all, the sector’s track record on conduct isn’t that strong. That’s why there’s a regulator in place, monitoring compliance with a raft of rules and principles.
Add to that the comments back in 2018 of the chief executive of the Financial Ombudsman Service to the Treasury Select Committee (more here). She saw the handling of customer data as the source of the next big surge (as per PPI sized) in complaints about financial services firms.
These are not circumstances that point to an industry code of conduct on telematics data taking off, let alone achieving traction in some layers of the insurance market where competition is fierce. Bear in mind as well that the carriers for most UK motor insurance business are domiciled in Gibraltar, not the UK. Does this mean any such code would have to be, not a UK code, but an British Overseas Territory code?
Interesting Times Ahead
The FCA is currently conducting a study into data ethics for the financial services sector. I’m sure telematics will feature in it. I’m less sure that they’ll capture the widespread and often subtle ripples that telematics is setting off, not just in respect of motor insurance, but across many other lines of business as well. This data ethics landscape for insurance is complex, yet navigable, with care.