As the benefits of mobile technology increase, large auto insurance carriers may drive competition and business growth by employing telematics and GPS technology to provide customers with usage-based insurance ratings on policies. "This is where the future of auto insurance is going," says Josh Kessler, analyst and product manager, TowerGroup (Needham, Mass.). "It has already seen eager adoption in the U.K. and the Netherlands. Over the next few years it should pick up steam."

Customers can voluntarily install GPS and telematic devices in their automobiles to track their driving behavior or miles driven, enabling premiums to be more accurately based on their risk for accidents. "We will get much more accurate data, and with this data we can better calculate our premiums and offer more attractive premiums to customers," says Ralf Kuehne, head of underwriting property and casualty for Winterthur, Switzerland-based Winterthur Group (US$872 million in net income), an insurer that is piloting a usage-based insurance program in Germany this year. "This is an opportunity for us to differentiate ourselves from our competitors."

The major hurdle impeding the adoption of usage-based insurance programs is the "Big Brother concept," explains TowerGroup's Kessler. "Privacy concerns are very high. If a company does have all your GPS data, litigation could potentially subpoena your GPS records to find out where you were." Customers are more apt to participate in usage-based insurance programs in Europe at the moment, according to Kessler, because Europe has stricter guidelines than the United States regarding the use of consumer information by businesses.

Another challenge has been installation and mobile technology expenses. Until recently, it has not been economical to retrofit vehicles with GPS for usage-based insurance. But the cost of mobile technology has decreased, and, in 2002, U.K.-based Norwich Union Insurance (Norwich, U.K.; US$548 billion) began pilots of a pay-as-you-drive program using IBM's (Armonk, N.Y.) cCross Telematics Wireless Automobile Solutions and OnStar (Troy, Mich.) GPS. Since the initial pilot began, Norwich Union Insurance has ordered an additional 35,000 in-car telematic black boxes to meet demand.

Prior to the pilot, according to Kessler, Norwich Union had based the average U.K. driver's premium on a driving distance of 11,000 miles a year. However, "With data collected from the Norwich PAYD system, users were averaging 8,500 miles a year, so for policyholders that drive less, there is substantial savings to the customer," explains Kessler. "Right now, U.S. insurance carriers are basing premiums on a customer driving 14,000 miles a year, so there could be great implications." -- Maria Woehr