Telematics policies can allow insurers to more accurately assess risk
The motor insurance industry faces a “significant shake-up” from the growing usage of telematics or vehicle-monitoring systems, according to Fitch Ratings.
Telematics systems are expected to have a big impact on the insurance industry for at least the next five years, particularly in the UK, where take-up could grow rapidly, the ratings agency said in a statement.
The UK insurer Direct Line last week revealed that it had doubled the number of telematics policies sold in a year. These policies, which involve the use of equipment to monitor driving behaviour, allow the insurer to more accurately assess risk for individual policyholders.
While overall telematics penetration remains low at about 2% of Direct Line’s motor insurance policies, it is around 60% for drivers under 21 years of age, reflecting the significant discount these policies can offer.
The UK has some of the highest premiums for young drivers as well as high rates of fraudulent insurance claims, which means it could be one of the biggest adopters of telematics, Fitch Ratings noted.
Direct Line’s high take-up of telematics policies by young drivers and strong retention rates point to growth of telematics policies over the coming years, which could gain further momentum if backed by government incentives. However, attracting older drivers will likely be harder as the potential premium discount may be smaller than for a new driver. Older drivers may also be more wary of the monitoring technology, the statement said.
The advantage for insurers in offering telematics policies is being able to more accurately determine premiums based on drivers’ risk profiles, rather than relying on traditional pricing factors like age, postcode and type of car. “Early evidence suggests that the lower premiums on these policies are more than offset by cost savings due to better risk selection and better driving behaviour by policyholders with telematics,” Fitch Ratings said.