#matteocarbone

What is the secret behind Italy having reached 15% penetration in telematics motor insurance? Matteo Carbone, principal at Bain & Company, shares his experience with bringing telematics and usage-based insurance to market.

Even though we’ve been hearing about telematics-powered, usage-based motor insurance for some time already, in most countries it has been slow to get off the ground. What do you see as the major obstacle? 

The major obstacle was the misleading concept of usage-based motor insurance - UBI motor insurance is about pricing. Instead we need to start speaking about telematics motor insurance. Telematics is about data use, not about pricing - elaborated variables, based on granular telematics data, used along the insurance value chain to achieve a more active role, not only used to build a risk model. From this perspective it is easier to understand how data gathered from connected sources can bring a terrific benefit to the motor insurance value chain.

 Is there a particular example that you like of bringing a motor insurance telematics product to market?

One interesting example comes from South Africa, where Discovery offer their clients an option to subscribe to Vitality Drive: clients can install the box and join the loyalty program at the cost of a monthly fee (about 5$). So they reverse the telematics model - from the usual discount on motor premium to a monthly fee for their reward program, without any discount on premium.

The value proposition is based on value-added services, personalized advice based on driving behaviour and the reward. This works well due to the fact that rewards are really attractive - the insured can obtain cash-back up to 50% of their fuel spend at one of Discovery’s partners.

   With about 15 % penetration, Italy is one of the most advanced markets in motor insurance telematics. Why Italy? How is it different from other European countries, e.g. Germany, France or the UK?

The answer has to be articulated in two parts.

First of all, Italian insurers started working on telematics in 2002. At that time the cost of telematics was high, but the high level of motor insurance rate allowed sustaining that cost. Also the insurers’ needs – due to fraud level - were favourable to this “telematics experiment”. Observing the level of insurance rates in Germany and France, only now telematics starts being cost-sustainable.

The second part of the answer could be found in comparison of the Italian and UK markets. In the UK telematics remains a niche solution, while Italian telematics went mainstream. Why is that? UK solutions were focused on identifying the best pricing approach and delivering segmented offers. On the other hand, Italian insurers developed simple products with a basic flat up-front discount and some services. As the number and level of services has grown, the insurers worked on exploiting the potential of telematics data on claims processes and also the distribution network gained confidence offering this product. These are the key factors behind impressive growth of the penetration in Italy, together with introduction of low-cost, self-installed solutions.

  How can usage-based products affect the bottom line of an insurer, if their full potential is utilized?

At Bain Telematics, Connected Insurance & Innovation Observatory we developed a framework based on five levers of value creation:

•    Risk selection - both acquisition of low risky customers and underwriting process quality improvement. If you analyze Progressive approach, you can see how they are not doing usage-based due to the fact that the monitoring period is only a few months and then they take back the device. They are only successfully reinforcing the underwriting phase.

•    Loss Control - setting up proactive intervention for claims management, thus reducing final cash-out using objective telematics evidence for claims settlement and finally developing preventive actions.

•    Services - having high value added services for drivers and also geo-localized insurance cross-selling and product offers from the motor ecosystem.

•    Risk-based pricing - based on quantity and level of risk exposure.

•    Loyalty and "behaviour-steering" - with loyalty systems based on detected customer driving behaviour, positive behaviour encouragement and insured engagement gamification logic.

  What is the Italian experience with the customers accepting this new product?

The value proposition for the insured is clear: they pay a fixed cost to rent the box and remunerate the services and they receive a discount on motor insurance premium and some services. Looking at the penetration by districts – with also some close to a peak of 40% -there is a correlation between penetration and average insurance rate. The higher the premium is, the easier it is for a distributor to sell. For sure at current telematics costs, it is really difficult to sell the telematics below some minimum level of insurance rate, and I think only an approach like one used by Discovery in South Africa can completely bypass this obstacle.

  Taking into account that telematics is relatively widely used in Italy, what are the key learnings we could take from you? Did anything surprise you, either on the insurer or on the clients’ side?

I think the key message is the possibility to go mainstream with telematics approach even before having developed any robust risk models and advanced telematics tariffs. Italian pricing approach is becoming more complex but still - based on the evidence of the Bain Telematics, Connected Insurance & Innovation - 14 of the 36 telematics offers in the Italian market are basic flat up-front discount products without any variable component linked to telematics information. The other 22 offers are UBI - only 8 are behavioural based, the others are pricing based upon mileage travelled.

I believe that technology innovations are able to change the insurance paradigm, but still there is no “one size fits all” approach. Insurers have to start their telematics program with defining the strategic goal they want to achieve by introducing telematics.