We've all heard the hype around usage-based insurance, where fees and premiums are dictated by how you drive, as well as mile-based auto insurance, which gauges your insurance costs based on what type of car you drive and how far you drive it.
But what does the future really hold for this new trend in insuring drivers? Currently, insurance companies sell usage-based policies by installing tracking devices in cars. This model is growing in popularity, but companies are facing some significant barriers to entry. Actual usage is verified through onboard telematics devices. The technology is expensive on a per-vehicle basis, with the cost of each device ranging from $75 to $100, depending on the level of sophistication. What's more, the drivers themselves are responsible for incurring the associated wireless data costs (and sometimes the fees can actually cancel out any premium savings).
Another challenge is a perceived privacy violation. Even consumers who favor this type of insurance model are balking at the possible "Big Brother" intrusion of being monitored by GPS while they drive.
Lastly, unlike traditional insurance, usage-based models track and reward "safe" drivers by offering them lower premiums. However, many argue that this differentiation is based on historical data, rather than real-time driving patterns. As a result, it may take a long time before safer -- or more reckless -- driving patterns or lifestyle changes actually impact a driver's premium, meaning accuracy can prove challenging.
Enter the IoT
Luckily, the Internet of Things (IoT) -- the network of physical objects that contain embedded technology to communicate and sense or interact with their internal states or the external environment -- is poised to make an impact by delivering the advantages of usage-based insurance without the business challenges.
Clearly, the sharp rise in usage-based insurance policies indicates that there is an increasing need, possibility, and opportunity to collect, process, analyze, and disseminate data from devices in an integrated way. Fortunately, with the use of telematics -- a subset of the IoT that has become increasingly commonplace with insurers adopting usage-based models -- the question for insurance companies isn't "Should we leverage the IoT?" Rather, it's "How can we leverage the IoT?" The answer is by leveraging the single access point that all drivers and cars have in common at any location: the gas pump.
We are working with a company called Verdeva that is developing a method for turning the gas pump into a connected kiosk for a wide range of vehicle-based transactions. Remember: Consumers spend more than 52 billion minutes annually refueling in the US.
The company plans to alter the current tracking model by installing RFID readers at gas stations and enabling interaction with toll payment transponders in cars. Instead of taking the miles from GPS tracking, it will calculate the difference between the fuel used between fillups and the average MPG of the automobile. This will provide insurers with regular updates on car and driver usage without specifically knowing where they went. The average driver stops to pump gas 60 times per year; this gives insurers regular intervals to track usage. For accurate usage information, periodically drivers will be asked to enter odometer readings.
Verdeva is taking this one step further by enabling insurers to sell temporary insurance right at the gas pump. This can be accomplished at a fraction of the cost of onboard telematics devices, with increased accuracy and without privacy concerns. Plus, knowing the car and driver involved in each transaction creates a detailed consumer profile that has significant value for retailers and insurance providers, which can deliver highly targeted advertising, and for government agencies, which can use that information to improve transportation policies.
What does this mean for you?
According to Gartner (registration required), insurance CIOs should take the following steps to "increase their capabilities with the Internet of Things:"
- Evaluate the marketplace for IoT technologies and their potential impact on your ongoing competitiveness.
- Monitor adjacent industries to determine where device data opportunities exist and how your company can test available technologies.
- Consider opportunities offered by new sources of data on factors such as lifestyle, driving patterns, and building status that are relevant to insurance risk. Use this data to create a roadmap for delivering underwriting data to support innovative product offerings.
- "Ensure that EA teams are ready to incorporate Internet of Things opportunities and entities at all levels."
- "Increase your knowledge and capabilities with big data. The Internet of Things will produce two challenges with information: volume and velocity. Knowing how to handle large volumes and/or real-time data cost-effectively is a requirement for the Internet of Things."
Insurers should be mindful of this advice because IoT connectivity has great potential to shake up and streamline industry initiatives.
Sean Lorenz is Technical Product Manager for Xively at LogMeIn, helping shape the Xively Internet of Things (IoT) platform roadmap and working closely with customers to understand how connected products and operations can help transform their businesses. View Full Bio