Is the black box really a Pandora’s box for insurers?
By Greg Horn
Intelligent vehicles are exciting to the driving public as well as to the companies that insure their cars and trucks—but for very different reasons. The intelligent vehicle technologies of greatest interest to insurance carriers are telematics, a broad term that encompasses a wide group of technologies that bring together analytics and mobility.
Telematic technologies collect raw vehicle data and overlay this information with geographic information system mapping data, such as road type and speed limits. As the cost of enabling technologies such as Wi-Fi, GPS, Bluetooth, 3-axis accelerometers, and mobile broadband communications have fallen—and as original equipment manufacturers are increasingly embedding telematics in vehicles—the result is that telematics are now in an estimated 70 percent of 2011 vehicles.
Other black box technologies include on-board diagnostics parameter IDs (OBD-II PIDs)—codes that request data from a vehicle—being used as a diagnostic tool. While standards vary by manufacturer, all cars sold after 1996 must support OBD-II diagnostics, mostly for state-mandated emissions inspections. OBD-II tools, along with driver behavior and vehicle tracking devices, are not exactly the same as event data recorders (EDRs), which are of primary interest to auto insurers because of their potential to help in risk mitigation and accident reconstruction.
EDRs developed out of vehicle air-bag technology. Auto manufacturers developed control units to detect a crash and deploy the bag, and then added data collection capabilities. This allowed for data storage, retrieval, and, later, analysis capabilities in order to improve air bag function. If a 2005 or older vehicle has an EDR, the owner’s manual will say so, but what the manual rarely specifies is how and what the EDR records in the event of a vehicle crash. Once an EDR is installed, it is an integral part of the air-bag system, and Federal Motor Vehicle Safety Standards forbid disabling any vehicle device, such as air bags, covered by a NHTSA safety standard.
The Potential to Change Auto Insurance Forever
Carriers see telematics like EDRs as good for both underwriting and claims. Telematics promise to fundamentally change auto insurance pricing because the information contained in black box technologies measures loss propensity risk characteristics in the form of actual driving behavior data (miles traveled, average speed, and much more), in contrast to traditional rating factors such as driver age. Insurers anticipate improved risk selection and pricing accuracy with black box data.
Telematics data will likely be used to build next-generation scoring models and analytics, too. Using telematics data in claims processing can shorten the claims lifecycle and further reduce losses, but there is true value in going beyond loss reduction and risk management to deploying telematics as a decision-making tool. With telematics, underwriting and claims become more closely intertwined. Pricing will reflect how a policyholder drives as well as actual driving conditions, in addition to many other predictors of risk. Auto insurance will become increasingly personalized and more cost-effective from the insurer’s point of view and more closely aligned with consumer driving performance, which will help with customer satisfaction and loyalty.
The industry is hoping that telematics will come to have a positive impact on driver behavior by significantly reducing crash frequency rates and corresponding claim loss reductions. Reducing driver speed with the aid of technology is largely seen as the key to this positive phenomenon. Telematics can help in risk management as well as in fraud prevention and theft recovery.
There are limits today to what telematics, specifically EDRs, can actually capture. Most EDRs gather data during a full frontal collision that causes visible damage to the vehicle, when there is sufficient damage to deploy the air bags. Potholes, curb hits, and the like do not generate data of interest to most EDRs at the moment, but as vehicles become more sophisticated and costly to repair, these seemingly minor bumps and bruises can set off a significant claims event. Side-impact air bags and rollover sensors collect more information, and these advancements are making their way into more vehicles.
Making EDR data usable is a real challenge. Some vehicle manufacturers have licensed third parties to develop tools to download data from an EDR, but today, few—including most professional accident reconstructionists—can retrieve EDR data. The data retrieval requirements are different from service technicians’ diagnostic equipment, too. Adding to the challenge is that some manufacturers have ensured that only their own engineers can retrieve the data.
Even if EDR data were easily extractable, insurers would need processes in place within claims and underwriting systems to make use of the information.
Black Box or Pandora’s Box?
Telematics works well with commercial vehicle fleets to improve asset utilization and reduce fuel consumption. Policyholders have an interest in usage-based car insurance—at least the good drivers do—but consumer privacy presents a big unknown. Some insurers have successfully sold telematics usage to parents of teen drivers, but the real privacy battle has yet to begin. Notably, while the collected data cannot identify the vehicle driver, in some cases the vehicle identification number (VIN) may be required to download information from the EDR. Once this becomes common practice and common knowledge, consumer privacy issues with EDR data may become a great deal more heated.
Regulatory issues will prove challenging for telematics and its potential to change the auto insurance business. Privacy legislation will definitely pose a problem, especially as telematics become more of a part of the claims settlement process. State insurance regulations have already proven difficult; for example, California restricts parameters that can be used in pricing, while Illinois requires public disclosure of underwriting models.
States differ wildly in addressing access to EDR data. In most states, the vehicle owner can give or deny permission to download EDR data. Actual ownership of the EDR and its data depends on state law. Courts can subpoena EDR data through court orders, and some states collect data under their existing laws governing crash investigations. There is a body of court cases where EDR data has been accepted in the proceedings.
In the event of an accident, EDR data is up in the air. Some carriers state in their policy contracts that the insured agrees to data collection from EDRs under an “Agreement to Cooperate” clause. However, some states have statutes that nullify these clauses, and there is plenty of potential for litigation. Insurers need a state-specific handling procedure to identify a potential vehicle with an EDR. They also need to develop a plan to preserve the evidentiary chain.
Too Much Data?
Telematics add yet more data to insurer systems and add to carrier challenges in squeezing business value out of disparate data sources, not all of which are yet fully integrated into claims and underwriting systems. Leveraging telematics data to make better decisions and risk assessment will require data mining and pattern recognition beyond the reach of many of today’s analytic solutions, especially in light of the regulatory uncertainty of what EDR data is acceptable at which part of the underwriting and claims process.
Claims adjusters already have a mountain of data with which to deal in the course of claims handling. Where does telematics data fit in? Where does it fit in the decision-making process? Can its inclusion in claims processing be automated, or must a specially trained adjuster handle the data in a claims settlement? Can the average adjuster handle multi-state regulations governing the admissibility of telematics data in the legal process?
It is easy to imagine a future in which mobile devices take over for the current telematics devices and software embedded in vehicles. Mobile devices increasingly come with accelerometers, and it is not difficult to envision a common auto and data platform being developed—and soon. Linking this—or at least making the collected data readily available to underwriting and claims systems—will help solve the data harvest and usability questions. Working on the regulatory, legal, and consumer communications issues at the same time will go a long way in making the most of the potential of telematics to change auto insurance for all parties in the vehicle claims process.
In the meantime, black box technology will continue to develop in ways that may clash with the safety and risk mitigation initiatives attractive to insurance carriers. The 2013 Ford Mustang will come equipped with an optional “Track App” that uses EDR information to show and record on the GPS screen the 0-60 acceleration times and other non-insurance-friendly information. Electric vehicles will make telematics very attractive to hybrid car owners when they provide routing information and nearest charge sources that will soothe consumer range anxiety. Car manufacturers interested in electric-vehicle adoption will sign on to telematics as a sales feature.
The Government Steps In
The government’s Intelligent Transportation System is a laudable initiative, but it comes with the risk of added complexity and bureaucracy. The U.S. Department of Transportation, together with the Research and Innovative Technology Administration, has released a strategic plan for multimodal Intelligent Transportation Systems (ITS) that holds some real promise for reducing accidents and increasing accident reconstruction capabilities.
The basis of the proposed system is connectivity with and between vehicles; between vehicles and roadway infrastructure; and among vehicles, infrastructure, and passenger wireless devices.
This will allow real-time traffic updates and suggest detours to avoid jams. Vehicle-to-vehicle communications can warn drivers with the right of way of oncoming vehicles that will not stop in time. Vehicle-to-infrastructure capabilities can beam transportation schedules to allow lane changes to avoid stopped buses or facilitate re-routing around blocked rail intersections. This continuous monitoring could potentially be a big payoff in accident reconstruction if there is a record of events that result in a collision.
All telematics run the risk of invoking the ire of consumers who fear Big Brother as the backseat driver, especially in the absence of clear policies and procedures at the government and claims operation levels. Accident avoidance capabilities can seem intrusive, but they also hold the potential to achieve exactly what is needed to avoid a collision: slowing down in time.
Greg Horn is vice president of industry relations for Mitchell International. He can be reached at firstname.lastname@example.org, www.mitchell.com.