1 Roland Berger Strategy Consultants content Fresh thinking for decision makers Telematics could revolutionize auto insurance premiums But in Germany it is still in its infancy The potential is already recognized in other countries With compliments Financial Services CC August 2011
2 TelemaTiCS the WAY ahead for flexible Premiums In 2010, police records listed 2.41 million traffic accidents across Germany, sixteen percent of them were due to inappropriate speeds. Telematics is intended to exert a positive influence on driving behavior, thereby enabling auto insurers to customize premiums more individually. 80 Euro 40 Euro 25 Euro 50 Euro 0 ro 60
3 content Telematics in auto insurance Auto insurance policies are frequently seen as interchangeable products that trigger no emotions in customers. That could soon change with innovations in the automotive sector that link vehicle telematics and auto insurance. The standardized insurance product will be a customized, telematics-based overall solution with a strong focus on loss prevention combining insurance cover with a digital guardian angel. Increasing mobility and networking, and the growing importance of telecommunications and data availability that this involves, are some of the trends of our time, and telematics is a telecommunications and computer science interface. The ever-rising number of smartphones is a visible testimony to this trend. They are used for communication, internet access, and much more. Data is constantly gathered and shared using these devices. Between 2010 and 2015 the global market is set to more than triple from 305 million to 980 million smartphones sold, while in Germany their share of the cell phone market doubled from 10% to 20% between 2009 and Information gathered by automotive telematics solutions today serves mainly to improve automotive safety and comfort, including roadside assistance functions, breakdown service, emergency calls, accident sensors, personalized settings, and much more. The potential has by no means been exhausted. An electronic logbook can be kept for business trips or the tax authorities. Stolen cars can be traced or immobilized by remote control. Data can be relayed to the auto insurer in return for lower insurance premiums. Linking the technology The technology for telematics-based auto insurance already exists Technology Already Exists The technology for telematics-based auto insurance has been around for years. A black box must first be fitted in the prospective user's car for the technology to work, however, thereby incurring up-front costs that can only be recouped over time via lower premiums. That is one of several barriers that have hitherto prevented telematics-based auto insurance from making a breakthrough in the mass market. It would be wrong to infer from this though that customers fundamentally do not accept the concept. Surveys have shown that one in three motorists could in principle already imagine taking out auto insurance for which the premium depended on their driving behavior. The insurer uses the data collected to reach precise conclusions about the motorist's driving behavior, allowing the insurance risk to be quantified in greater detail, which in turn allows the right premium for the risk to be determined more exactly. The insured person's risk profile can also be improved by means of things such as advanced driving courses and eco-awareness, leading to lower claim frequencies and amounts. Furthermore, the combination of a technical safety package, a greater emphasis on loss prevention, and an insurance policy offers generally greater customer benefit and customer loyalty, which has been a major weak point for many auto insurers. securing approval One in three motorists can already imagine taking out auto insurance that is influenced by driving behavior
4 Roland Berger Strategy Consultants Promise of Lower Premiums Probably the strongest argument as far as the customer is concerned is a lower insurance premium from which customers benefit far faster than in the past as a reward for a track record of good, safe driving. Premium adjustments are influenced less by the long-term claims history and more in the case of telematics-based auto insurance solutions by short- to medium-term driving behavior. Depending on the degree of product innovation, you could Pay as you drive or Pay-how-you-drive. The premium depends on the time of day when you drive, or the types of road, or how the driver responds to advanced driving courses. In connection with eco-awareness the integration of telematics services to support eco-efficient driving the trend is toward Manage-how-you-drive. exercising influence Road safety-aware driving can reduce premiums and thereby convince the customers Telematics-based auto insurance helps the customer to settle claims in a way that is generally faster and more comfortable. The greatly improved data base enables shorter processes with expert reports and documents reduced significantly. For some customers the resulting transparency may naturally have a negative side in that greater transparency means potential data protection risks. For the insurer, the number of claims and the cost of handling them can be expected to fall because a telematics-assisted data base will enable claims to be settled correctly much faster. What is more, telematics will reduce the cost of claims, the principle being that swifter assistance leads to lower accident follow-on costs. Once an accident is reported, the customer can be passed on promptly and systematically to partner companies with whom the insurer can cooperate directly. Optimized data and a higher inhibition minimize possibilities of insurance fraud because the vehicle owner will of course be aware that the data provides the insurer with a more detailed knowledge base. Telematics also improves theft protection an aspect that is not to be neglected in that a car with telematics on board is a far less attractive target for car thieves. As a result of falling costs and lower premiums, profitability cannot be expected to increase, and introducing an individualized insurance model involves high initial operating costs and some degree of cannibalization of the existing portfolio. Yet once the technology has made a breakthrough, insurers who decide not to make use of the possibilities of telematics will face the problem of adverse selection, with the bad risks accumulating in their portfolios. Protecting against theft Telematics can also deter automobile thieves because the vehicle can be located more precisely When all of these arguments are taken into account, the following core questions arise for the German auto insurance market: How will telematics-based auto insurance offers develop in the next three to five years? What market changes will they usher in on the German auto insurance market and how should I, as a German auto insurer, position myself to lay the groundwork for a successful future in spite of the ongoing uncertainty about future market scenarios?
5 content Telematics in auto insurance Ripe for the Mass Market Roland Berger Strategy Consultants assumes that this technology will, in the medium to long term, achieve a breakthrough in the mass market, including the German auto insurance market. We base this conviction on four factors: 1. The consumer: Studies indicate that in principle 30% of consumers are interested in auto insurance with premiums that are based on actual usage. In addition, the number of potential consumers will increase as more and more cars have the necessary technology built-in. Awareness and acceptance of the previously largely unknown technical possibilities will increase accordingly because they offer the customer a wide range of possible features. 2. The technology: As usual in a technology's lifecycle, the price will fall over time and economies of scale will start to kick in. At the same time the hardware required will grow steadily smaller and no longer be just an automotive add-on. It will become a fully integrated core component of the vehicle or of mobile terminal devices such as smartphones and increasingly widespread as the necessary infrastructure is installed in the road network. giving it time to mature Roland Berger anticipates that this technology will breakthrough onto the mass market in the mediumto long-term 3. The regulator: The regulator will promote the use of telematics in automobiles mainly on the grounds of driver safety and environmental protection. This is clearly indicated by the European Commission's pan-european ecall initiative. EU authorities are trying to ensure that the required technologies are incorporated in the medium term in every new car that is registered in Europe. Political discussion of a road toll for private cars in Germany would also benefit greatly if new cars were fitted out with telematics technology as a standard feature. 4. The industry: A telematics industry can be expected to take shape that will of course focus not only on automobiles but also on other areas such as healthcare and sport. This could lead automatically to reciprocal effects involving in-car use. As yet, the German auto insurance market is neither a trendsetter nor a driver in telematicsbased auto insurance products. In Europe, over one million customers already have telematicsbased policies. Italy in particular is relatively positively disposed toward this product innovation and therefore enjoys preferential treatment by international insurance groups as a test market for this innovation. Overseas too in the United States, where Progressive, a major auto insurer, is the driver offers are already undergoing market trials and product development is being intensified. From this angle as well, the German market can be expected sooner or later to develop in a similar way, possibly driven by positive market experiences in other countries along with growing unease about product expertise accumulated there and a possible market entry by international players with this expertise. developing infrastructure The infrastructure needs to be expanded across the road network
6 Roland Berger Strategy Consultants preventing misuse Data security must be given absolute priority. Customers must feel sure of total transparency about the availability of their data Focus on Data Protection Telematics is by no means a self-starter in auto insurance, however. The cost of the technology is just as much a potential hurdle as its operational complexity. One of the biggest obstacles is likely to be data protection, however. The technology will only be able to come into its own if it fulfills data protection requirements exactly and no doubts as to their fulfillment arise. One option could be to separate the service provider and the insurance provider. The insurer must guarantee total transparency as to which data is essential for insurance purposes and which is not. Customers ought also to be able to check which data they are providing and to have given their express consent to its use beforehand. Looking at the bigger picture, however, these issues pale in significance when they are compared with the opportunities that telematics offers and the opportunities that would be missed if the technology were ignored. With the effects outlined above, telematics can not only take an auto insurer's business model forward but can revolutionize it, especially as genuine innovations have been rare in this area in recent years. The groundwork for telematicsbased auto insurance has already been laid, and consumer interest also exists. German insurers must now take care not to miss the boat. They must think ahead, consider the effects on their own business models, and develop a strategic position of their own on this issue and its major long-term potential for market change. Competition Doesn't Sleep If you fail to look into the subject intensively today, tomorrow you may be forced by your customers to do so or to make way for new competitors. The auto insurance customer interface is especially likely to undergo a major change. As potential gatekeepers of the customer interface, OEMs seem for one to be especially well placed because they already sell a significant share of auto insurance for new cars in Germany along with the car (in Volkswagen's case for more than one in three new VWs sold). IT and high-tech players such as Apple, Google, and Microsoft are also gaining closer access to the customer with their smartphone products and cell phone operating systems, as smartphones increasingly find their way into automobiles. Mini Connected is a case in point. The Mini serves as a docking station for the customer's iphone and customers are thereby able to use customized iphone services in their cars. This can be taken as an indication that OEMs are running a medium- to long-term risk of losing value chain components to the smartphone manufacturers, who can leverage their shorter innovation and product lifecycles against the competition. This could also lead to new access routes that would enable insurers to bypass the OEM. It is therefore advisable to make an early systematic commitment to strategic partnerships with a view to securing a much better position on issues such as data ownership and customer ownership.
7 content Telematics in auto insurance Many questions remain to be answered, of course, if telematics-based auto insurance is to reach a mass market. Yet German auto insurers should not wait any longer to look into the subject intensively. It is just a matter of time before telematics becomes established on the mass market. Roland Berger Strategy Consultants recommends a five-stage approach: 1. Define a telematics strategy It is necessary to define your own view of telematics-based insurance. Developing a medium-term strategy should take into account strategic core issues such as partnerships. The use of dedicated resources and support for the subject by a sponsor in senior management are vital for this phase. 2. Develop a target group oriented offer Target groups and their needs (safety-conscious drivers, low-mileage drivers, pricesensitive drivers, aficionados of an OEM brand, teenagers, commercial fleets...) must be identified. Once market potentials have been established products can be developed. Price models for policies are derived from the data collected. This is followed by setting a market entry schedule. strategic approach Concept partnership message offer strategy Insurers should take the time to look into telematics and adopt a five-stage approach 3. Work out a convincing message Professional communication is essential. The savings potential, educational effect, swift settlement of claims, and greater safety behind the wheel for the customer will help you gain a rational access to the subject. At the same time, possible data protection issues and any other misgivings must be considered. 4. Set up strategic partnership Strategic partners are indispensible for a successful market entry. Relevant issues are speed of market entry, risk management, market knowledge, and defined target groups. Partners could, for examples, be OEMs, workshop chains, automobile clubs, technology manufacturers, and many others. 5. It's the right concept that counts Those who can balance the different factors will succeed. Larger markets and broader product ranges, a larger share of wallet, and greater customer loyalty are some of the positive effects. Negative effects include lower premiums per customer and partly higher acquisition, product, and operating costs. IF YOU HAVE ANY FURTHER QUESTIONS, WE ARE AT YOUR SERVICE ANYTIME: Christoph Winter, Partner +49 (89) Jürgen Thiele, Partner +49 (69) Sebastian Steger, Project Manager +49 (89) think:act CONTENT ditors: Prof. Dr. Burkhard Schwenker, Dr. Martin C. Wittig Project management: Dr. Katherine Nölling Roland Berger Strategy Consultants GmbH Am Sandtorkai 41 D Hamburg
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