Insurance telematics in Europe: The tipping point is near, part I
Historically, the European insurance telematics market existed mainly in countries plagued with insurance fraud, car theft and high insurance costs. But experts say all that is about to change. In the first of a two-part series, Brendan McNally reports on what is expected to happen.
With all the talk recently generated by the entry of usage-based insurance (UBI) products into the U.S. and Canadian auto insurance markets, it’s easy to lose sight of the fact that the biggest UBI market is, in fact, Europe, and that the market is about to get a lot bigger.
Of the 28 countries that make up the European Union, UBI currently has a strong presence in only two of them; Italy and the United Kingdom, though it is also present to a significant, but lesser degree in Spain and Portugal. Depending on whom you talk to, this comes to a total of between two and 2.5 million cars with UBI, which may not seem like a lot. But experts say it represents an important milestone for UBI adoption to accelerate going forward.
In Italy, where as many as two million passenger cars are fitted with insurance telematics, the overall penetration level is now approaching 5%, which experts say, represents the tipping point. And once the tipping point is reached, they expect drivers to rush to UBI en masse in order to avoid having to subsidize worse drivers.
Ofir Eyal, principal management consultant of The Boston Consulting Group, explains it this way: “If you focus on the different segments, for instance, young drivers, once penetration exceeds a certain tipping point within that segment, it will mean that the non-telematics clients in the segment will be charged massive premiums as they are perceived to be a bad-risk pool. [This] will increasingly drive them to telematics."
(To get the full picture, check out our just released Insurance Telematics Report 2014.)
Onward and upward with UBI
As this begins to play out in Italy, drivers elsewhere in Europe will too be offered UBI products. And, increasingly, as UBI broadens its appeal to include consumers from all walks of life, these offers will come not only from insurers but also from telematics service providers (TSPs), mobile network operators and even car OEMs. “It’s not necessarily the stereotypical young driver from the stereotypical high-risk areas of the south of Italy [any more],” Eyal says. “The distribution of telematics ‘car-parkers’ is not far off the distribution of the car-park in general in Italy.”
In both Italy and the United Kingdom, auto insurance is expensive, largely because of a historically high incidence of insurance fraud, auto theft and risky driving. Drivers who enroll in UBI programs in these countries primarily do so to protect themselves against fraud and to get lower insurance rates by demonstrating good driving behavior.
The rest of Europe
Other European countries, where problems with insurance fraud or theft are not so great, insurance premiums have always been much lower, and so there has been little to impel drivers or insurers toward telematics. Even so, it is expected that they will too become UBI adopters on a large scale.
There are several reasons for this.
First, although each of the more than two dozen countries in the European Union might have its own regulations regarding insurance, they are all increasingly being compelled to bring their pricing and ratings mechanisms into line with those of the other members. In 2011, the European Court of Justice ruled that gender can no longer be used as a rating variable when calculating insurance risk. Similar rulings are expected regarding age and perhaps even postal codes. And this, in turn, is likely to cause insurers to start using performance-based variables, which can only be provided by telematics devices, for assessing risk.
Another reason is a pan-European initiative called eCall, which, if implemented, will require, beginning in October 2015, that all new-model passenger cars and light commercial vehicles to be fitted with a telematics device that uses 112 emergency call technology to alert emergency services in the event of a driving accident. It follows that insurance telematics solutions could piggy-back on the eCall telematics device.
Italy represents Europe’s most mature market for UBI. That it would be a near-perfect growing medium for UBI is hardly surprising given the country’s €4,797 average claims cost and a considerable claims frequency, largely due to widespread exaggeration of personal injury claims. As a result, very mild injuries (1-2% disability) account for some 15% of claims and 78% of non-severe injuries.
The first telematics systems were GPS-equipped location devices for stolen vehicle recovery, followed by forensic sensor systems for crash reconstructions. The systems have worked well. The data they produce is admissible in courts of law and the result is that Italy is beginning to finally see a reduction in insurance fraud cases.
More recently, UBI capabilities have been added on, allowing drivers to demonstrate good driving behaviors and thus earn reduced insurance rates.
When British auto insurance companies began experimenting with insurance telematics, they found that Italian TSPs already had the technology in place and that it was readily adaptable to the British market. There is currently a large number of insurance telematics programs being offered to British drivers. These programs rely primarily on insurer-installed devices, but apps installed in smartphones are also gaining.
UBI penetration in the United Kingdom has not yet reached the levels it has in Italy, but the expectation is that, once it does, acceptance will skyrocket higher than the Italian market, according to Eyal.
(Return next week for part two of the series.)
Brendan McNally is a regular contributor to TU.
For all the latest telematics trends, check out Content and Apps for Automotive Europe 2014 on April 8-9 in Munich, Germany, Insurance Telematics Europe 2014 on May 6-7 in London, Telematics India and South Asia 2014 on May 28-29 in Bangalore, India, Insurance Telematics Canada 2014 on May 28-29 in Toronto, Telematics Detroit 2014 on June 4-5 in Novi, Michigan, Advanced Automotive Safety USA 2014 on July 8-9 in Novi, Michigan, Insurance Telematics USA 2014 on Sept. 3-4 in Chicago, and Telematics Munich 2014 on Nov. 10-11 in Munich, Germany.
For exclusive telematics business analysis and insight, check out TU’s reports: Insurance Telematics Report 2014, Connected Fleet Report 2014, The Automotive HMI Report 2013 and Telematics Connectivity Strategies Report 2013.