In our previous installment, we outlined the litigation risk insurers and telematics companies face as the industry balloons and the coveted data it uses gains value outside of the insurance context, specifically as such data is used in a variety of legal cases including vehicle accidents, divorce proceedings and contested child custody cases. The near-term costs of addressing the swelling number of subpoenas for telematics-generated information will soon reach $700 million, with at least $2 billion in legal costs expected by 2018.
This installment covers strategies that insurers can follow to reduce or even avoid incurring such dramatic legal costs. Examples also are provided of companies and services that collect less data while still delivering practical information for underwriting models.
First, establish the level of granularity needed from telematics data. Over-collecting data can lead to significant and unnecessary liability. "Collect only the limited data you need. If it isn't critical, don't collect it," a former in-house counsel with a leading commercial telematics company says. Users of telematics data must measure the pros and cons of collecting moment-to-moment data like speed, detailed location, trips, hard stops and cornering.
For example, some auto insurance companies and their telematics providers are collecting detailed second-by-second data to create an elaborate behavioral fingerprint. While it may satisfy the actuarial demand for more data to accurately underwrite insurance policies, the potential risks and costs of collecting and maintaining that data must be considered. Plus, what is the unintended risk to their customers who now have incredibly detailed portraits of their driving habits – both good and bad? Are more elaborate underwriting models worth the risk that this detailed, and often very personal information, might be discoverable in a court of law? Can users of telematics data get the same desired result collecting less frequent, less detailed, and less "privacy invasive" information?
Certain insurers have shown significant foresight by creating usage-based insurance products with very limited data. For example, both State Farm and National General, as well as a few others, have created auto insurance policies with usage-based discounting using only mileage data that can be collected from OEM sources like OnStar and Ford Sync. The algorithm is simple: the less a car is on the road, the less likely it will be involved in an accident. Consumers easily understand that value proposition, and appreciate its transparency. Insurers value the non-subjective nature of mileage data, and the fact that it is non-controversial and of little interest to plaintiffs' attorneys.
Decide if it's necessary to capture "that much" information all the time. There are some UBI systems that record information in brief time frames, often at the discretion of the consumer. Progressive's Snapshot asks drivers to collect information for only a limited timeframe, and then uses that information for longer-term ratings. While the information collected is detailed, it is not ongoing and therefore limits the extended exposure of its policyholders and itself. Some companies "score" detailed data and then delete the raw data to reduce the intrinsic exposure of detailed data retention. Although this is a viable alternative, it reduces consumer transparency and prevents a driver's ability to dispute and correct an inaccurate score.
In the UK, insurer Aviva has a "RateMyDrive" program that builds a driver profile using only 200 miles of driving data collected via a smartphone app. Despite its long relationship with Progressive in the U.S., Aviva has determined that a very limited period of data collection using a smartphone is "good enough" to provide a valid basis for a usage-based insurance ratings program.
Be certain the consumer knows exactly what's being collected and why, and that there is compliance with all relevant privacy laws. This requires telematics companies, and those contracting for telematics services and data, to make the effort to keep up-to-date on evolving privacy laws and regulations. Additionally, beyond the strict requirements of the law, those in the telematics industry should proactively ensure that consumers understand precisely what data is being collected, why that data is relevant, and how that data is being used. Companies involved with telematics do not want to suffer from a collective, public "ah-ha moment" when drivers finally catch on to the fact that they are being tracked in an invasive manner. As data collection and usage changes, consumers should be alerted.
Consumer privacy and transparency must be central to the business decisions and processes of those collecting vehicle and driver data. Further, consumers have the right to understand and even have some control over their personal data. The answer is not to abandon telematics and smartphone systems used to collect vehicle and driver data, but rather to be satisfied with roughly equivalent results using less data. The unintended consequences of aggressive data collection may prove to be more costly to all participants than initially contemplated.
The simple truth is that even a periodic capture of vehicle location and odometer readings can give insurers and vehicle service providers the information they need to underwrite better policies and make smarter business decisions. The added benefit is that this narrower range of data will be in less demand in legal proceedings, and its use will be easier to explain to the consumer.
In summary, vehicle telematics can provide important information to multiple constituencies in the vehicle ecosystem, but a keen awareness of the strategic benefits and risks of collecting that data must be fully understood. Consumers can and should benefit by knowingly sharing their vehicle and driving data. However, the significant financial and PR risks of over-collecting data and even being accused of "tracking" by consumers is an expensive one for those in the telematics arena.
About the author: Fred Blumer is co-founder of Vehcon, a provider of smartphone-based insurance telematics technology. He also co-founded Hughes Telematics and before that practiced international corporate law.