Telematics insurance appeared in Western Europe about twenty years ago. This concept covers different pricing methods which are available under their English acronyms: Pay-as-you-drive or PAYD or Pay-how-you-drive or PHYD. The idea underlying these different approaches is to adjust the insurance premium at the end of the contract, i.e. once the risk has been realized. We also speak of Usage-Based-Insurance or UBI – which is perhaps more explicit.
To date, these techniques have only applied to motor insurance, probably because this is the most widely used type of contracts, and the contract with the xhighest premium, at least in the case of non-life insurance for individuals. Concretely, the insured pays an initial premium calculated according to traditional techniques, and the insurer pledges to return part of this premium if the insured drives well. The approach is not that of the bonus-malus because there is a rebate on the premium that has already been paid, and not a discount on the future premium. And above all, the bonus-malus only takes into account accidents, whereas usage-based-insurance takes into consideration the whole behaviour of the drivers : whether they have respected the speed limits, where and when they drove, whether they used their phone while driving, whether they took a break or didn’t…
The amount of the rebate varies depending on the companies, but the range is 30 to 50% of the premium paid, with a gradation based on the more or less cautious nature of the driver. One important point: if it turns out that the driver was reckless, the premium cannot exceed the initial one. To assess the behaviour of the insured, the first method used, which still remains dominant today, is to implement a GPS device in the vehicle. This “snitch” conveys vehicle driving data to the insurer or a specialized service provider, and the data are analysed using Artificial Intelligence techniques. Today many insurers offer to install an app on the insured's mobile phone and it is this phone that transmits the data. Other techniques will emerge in the future, in particular the use of the OBD socket found on all new vehicles.
These pricing methods have been welcomed differently in several countries. If we stick to Western Europe, usage-based-insurance has been very successful in the United Kingdom and Italy but not so much in Spain, Benelux or France. Germany is in an intermediate situation as we shall see later. If we stick to a somewhat basic communication approach, this concept of insurance for use ought to be a spectacular success. All policyholders have dreamed of paying a "fair price", i.e. being charged with a premium that covers their own risk and not the damage caused by the reckless drivers.
Market observation shows that the success has not been dazzling and may be considered even disappointing. Everywhere, but to varying degrees depending on the country, policyholders are reluctant to transmit their driving data to a third party. They fear that the speed data, for example, may be transmitted to the police by their insurer, this may be a fantasy, but it is a hard lived fantasy. More broadly, we observe a lot of concern among customers when it comes to transmitting personal data to an insurance company. However, there is less reluctance when the insurer is a mutual company enjoying a better image than capitalist companies.
In a similar fashion, the installation of a GPS device, commonly known as a “snitch”, is also considered worrying by many policyholders who see it as an invasion of their privacy. It is true that these devices mean that a third party, a service company or an insurer, will be able to follow the insured. So many oppose it, even though they have nothing to hide. Conversely, the very same capacity explains the success of telematics insurance systems among truck fleet managers : The company will know what each of its drivers is doing, where and when they take their breaks and the time they spend on each delivery.
The cost of installing these devices has long been an obstacle to the success of this form of insurance. Depending on the models and companies, the cost amounts a few hundred euros, which is not negligible if we compare it to the price of a car insurance contract. Companies have understood what hurdle This might be, and today either the company covers the installation of the “black box”, or it offers a system that connects customer's phone with a free app. This is the reason why the use of telephone is more and more widespread. To this economic dimension, it should be added that using the telephone automatically makes it possible to detect the times when the driver uses his telephone when he is driving. Using one’s telephone while driving has a very negative impact on the algorithms which make it possible to evaluate the discount to be granted to the customer. Beyond these objective factors, the main obstacle to the development of usage based insurance lies in the level of the average premium observed in each market. As we have said, depending on the company, the portion of the premium returned to the customer in the event of good behaviour varies between 30 and 50% of the initial premium. A first obstacle lies in the fact that policyholders do not know along which criteria the discount will or will not be granted and for what percentage of the premium. In the best of hypotheses, the companies indicate the criteria taken into account : speed, place of circulation, emergency braking, etc., but they do not specify the weight of each criterion in the algorithm. To use an understatement, one may recall that clients do not always fully trust their insurance company or their insurer honesty. There is a factor of uncertainty here that is difficult to remove.
The other price-related obstacle is a major one : it is the very level of the premium. In countries like France or Spain where the average premium varies between 400 and 500 €, a discount of 30 to 50% represents between 100 and 150 €, without certainty and following criteria that the insured do not know, are they willing to have a snitch in their car which seems low compared to the constraints that telematics insurance imposes to the customer. In the hope of winning 100 or 150 € are the insured willing to have a “snitch” installed on their car or change their telephone into an informer? So far the answer is often no.
Finally, one of the obstacles to the development of telematics insurance is the presence in several markets of “insurance by kilometers” which is sometimes wrongly classified in the category of insurance by use. This formula, widely spread in France, is particularly suitable for the second vehicle of a family or for vehicles used by seniors who drive short distances. The contract provides for a premium allowing the insured to travel a certain distance, typically 7000 kilometres per year. If the insured exceeds this ceiling, they will pay an additional premium to the insurer. In practice, subscription and management are very simple: the insured simply declares to the insurer the kilometres travelled during the year. At the time of a claim, a simple reading of the car odometer makes it possible to check the accuracy of the insured’s declaration. On the French market, this type of contract has existed for more than thirty years and removes from telematics insurance the target that could have been the short distance drivers.
Conversely in the United Kingdom, where average premiums are higher and also more fluctuating from one year to the next, Pay-as-you-drive systems are very successful. The figures that follow come from the operators themselves and not from the supervisory authorities, and must therefore be interpreted with caution. In the United Kingdom we are talking of nearly two million contracts to be compared however to the 32.7 million passenger cars registered in the United Kingdom. Surprisingly, because the Italian car insurance market has shown little interest for innovation, Italy is the country in Continental Europe where usage- based-insurance is most widespread. Admittedly, as in the United Kingdom, the average premiums are high, but above all the Italian government has seen the installation of GPS devices as a mean of combating car theft and fake accidents. In 2017, a law made the installation of these devices mandatory on new vehicles and encouraged insurers to promote this form of insurance. It is estimated today that 4.3 million vehicles, or 15% of the total car fleet, are insured under these conditions.
Conversely, in most other Western European countries, the development of usage-based insurance remains confidential. In Benelux and Switzerland, we are talking about 10 to 20,000 policies, and in Spain or France from 50 to 100,000 contracts, compared to the 30 million private vehicles circulating in Spain and 33 million French cars.
There remains the case of Germany which, with 700,000 usage-based-insurance contracts, is a special case, with a lower penetration than in the United Kingdom but a much greater one than in France. The explanation seems to lie in the fact that the CEO of a large German company decided to make telematics insurance the main motor product of his company. It seems that the 700,000 German Pay- as-you-drive subscribers are mainly customers of this company.
In conclusion and on a more academic level, one may wonder about the logic of an insurance model that is based on the idea that each insured person must pay their “fair price”. If everyone - and this will soon be possible thanks to Artificial Intelligence - pays a premium corresponding exactly to their risk, the notion of pooling on which insurance is based, disappears. Gone is the world in which the lucky pay for the unlucky. In such a context, the insured who will know that they have no risk will cease to insure when the person who represents a risk no longer finds an insurer. Usage-based-insurance, because it charges the real premium after the risk has materialized, carries with it its own contradiction. In countries where the car insurance market is functioning properly, the different Pay-as-you-drive or Pay-how-you-drive modalities will remain niche products. They will meet the needs of novice policyholders who, if they behave well, will see their good behaviour rewarded or those who, after causing accidents, decide to change their behaviour and adopt reasonable driving.
This text is the summary of a conference delivered at the first annual meeting at the Eastern European Risk and Insurance Association – EERIA - in Skopje, september 2022.