As regulators restrict the kinds of data insurers use for pricing models, the data-centric insurance industry is turning to a potentially revolutionary new source, User-Based-Insurance (UBI) or Telematics, in an attempt to more accurately reflect the actual risk that individual customers present.
In no small way, this initiative is being fueled by the explosion of new data that is being made available by various technologies. But is the insurance industry ready to handle the velocity and volume of data that UBI plans promise to generate, and can they separate pertinent data from all the noise that will be generated?
Equally important, how prepared is the trucking industry to leverage UBI to their advantage?
User-Based Insurance and Telematics have been used interchangeably but they really are two very different entities.
Pay-As-You-Drive (PAYD) is the foundation of User-Based Insurance. It is by far the simpler of the two, referring simply to the mileage that is driven. The presumption behind PAYD is that crash potential rises with the number of miles that are driven. This ignores other data that suggests that low-mileage drivers have higher crash rates.
Often there are qualifiers added to PAYD plans, such as the time of day that driving occurs (rush hour, late night, etc) or jurisdictions in which the driving occurs (claims costs tend to increase in tort jurisdictions v. no-fault jurisdictions).
In either event, this type of plan is probably better suited to private auto as opposed to commercial fleets.
Pay-How-You-Drive (PHYD) is a more sophisticated plan that relies on GPS devices to track a number of factors – date, time, location, speed, acceleration/deceleration, hard-braking applications, fuel consumption, and cornering are just a few of the factors being considered.
PHYD plans can provide real-time feedback to both the carrier and the driver based on customized parameters. In turn, this can provide a strong incentive for drivers to improve their driving habits.
Telematics tracking devices include embedded navigation systems, on-board diagnostic devices, standard black boxes, smart phones, and tablets.
The allure of telematics is enormous.
For certain segments, it enables insurers to commoditize their product, as South Africa’s Hollard Insurance is doing by selling policies with variable mileage caps, very similar to the cell phone industry’s pre-paid phones.
For the commercial fleet segment, it enables insurers to better align pricing with the actual risk presented.
The challenges, too, are enormous.
Leaving aside technology issues like data interfaces and how to manage the volume of data that will be coming at them continuously, there are two key challenges insurers must overcome.
The first issue revolves around establishing benchmarks by which carrier and driver performance is going to be measured. This aspect can be further sub-divided into two issues.
Using “big data” analytics, insurers must firstly determine the relationship between the data and crash causation, as well as how strong the relationship is. For example, in 2004, when ATRI published, “Predicting Truck Crash Involvement”, many were surprised to find that there was a much stronger relationship between improper lane changes and crashes, than what existed between following too closely and crashes.
Next, insurers are going to have to determine the levels of acceptable deviation and how those levels are impacted by equipment usage. Fundamentally, for example, most would agree that hard-braking applications have a relationship to crashes. What remains to be determined is how many hard-braking applications are acceptable and is that number impacted by whether the equipment is being used for local P&D work in the GTA or running the highways of Saskatchewan?
The second issue that will need to be addressed is ownership of the data. For the trucking industry, the question becomes will you be able to take the data with you, if you elect to change insurers?
These challenges will be overcome and the potential rewards associated with telematics are simply too great for the trucking industry to ignore.
Telematics can reduce crash costs, fuel consumption, and insurance costs. Given the increasing levels of scrutiny that carriers are being subjected to, telematics provides a measurable means to demonstrate how safe they are, creating competitive advantage.
The challenge for carriers will be to convert the standards established by telematics into performance standards and to adopt a behavioural-based driver management system.
Telematics, in some form, is coming … don’t lose the opportunity to improve your profitability by reducing your losses.
“Rick Geller, President of Trucksafety.ca, has been providing innovative and cost-effective solutions to the trucking industry for more than 30 years. He is the recipient of the Canadian Trucking Human Resource Council’s “Champion of Human Resources” award, Vice-chair of the Toronto Chapter of the Fleet Safety Council, Vice-chair of the Fleet Safety Council Conference Committee, and serves on the Executive Committees for both the Ontario Truck Driving Championships and the Toronto Regional Truck Driving Championships. Rick can be reached at firstname.lastname@example.org “
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