In Focus: Could telematics present a win-win for insureds and the industry as the cost of living crisis ramps up?

The UK economy is facing one of the toughest periods in recent memory.

The Office for National Statistics reported in August 2022 that the Consumer Prices Index, which measures pricing inflation for consumers, had risen by 10.1% in the 12 months to July 2022 – the first time this value had breached 10% in 40 years.

The government department also noted that the real value of UK workers’ pay has continued to fall at the fastest rate in 20 years in the three months to June 2022 (3%) as wage increases were outstripped by soaring inflation.

Furthermore, there is a recession looming. The Bank of England said in August 2022 that it expects the economy to keep shrinking in the final three months of the year – and continue shrinking until the end of 2023.

Meanwhile, the National Institute of Economic and Social Research estimated in May 2022 that 1.5m households in the UK would struggle to pay for food and energy bills amid the current cost of living crisis.

These trends affect the motor insurance industry. With less money in their pockets, consumers feeling the pinch will increasingly be chasing discount offers and deals in the hunt for the best price.

At the same time, however, many motor insurers are raising their premiums to account for higher operating costs. In August 2022, the ABI reported in its quarterly Motor insurance premium tracker that the average price paid for motor insurance rose by £5 in Q2 2022.

So, how can motor insurers help consumers navigate the rising cost of living while also keeping their own costs down? Telematics may present a solution.

Black box thinking

Telematics-based motor insurance policies utilise a device – sometimes known as a black box – to track a mix of driving behaviour, location, the time spent driving or distance driven and speed, among other factors.

By leveraging this data, insurers are able to offer reduced premiums to certain customers.

Colin Smithers, chief executive of Redtail Telematics, explained: “Telematics enables risk reduction for the insurer and this passes through in the form of lower premiums.

“Telematics policies are also more likely to renew. Risk mitigation is mostly achieved by guiding drivers to drive more safely.

“It is also used in low annual mileage situations to price more fairly, as insurance risk is strongly correlated to annual mileage – the same way [that] more hours on the battlefield are more likely to result in a casualty.”

Risk reduction is inherent within the use of telematics technology. Matt Munro, chief executive of broker IGO4, saw this trait around 10 years ago and observed how it could work to help keep customers’ costs down.

He explained: “What we found was that someone who was willing to take a black box was then proven to be a better driver because they were willing to have their driving behaviour measured and wanted a premium based on how they actually drove.”

Munro’s broking business now provides customers with the opportunity to have their premiums reduce across the policy year, based on their driving behaviour and mileage –  he added that roughly 60% of the firm’s customers are given a net discount during the policy year based on these metrics.

Telematics insurtech By Miles, however, offers a slightly different proposition. It offers customers premiums based on how many miles they drive each month –  plus a small additional premium amount to account for static risks.

James Blackham, chief executive of By Miles, told Insurance Times: “Half of all drivers are now using their cars less to save money and we fundamentally believe that if their car is parked up, then their premiums should be too.

“The cost of living crisis is baring its teeth for drivers – with fuel, repairs and [the] price of cars on the rise – so when we asked drivers how they had reacted [to this situation], it was sadly not [a] surprise to learn that many are having to make changes.”

By Miles conducted a survey of 2,000 UK adults between 6 and 9 May this year which revealed that two-thirds of UK motorists had taken action to cut spending in response to the cost of living crisis, with 49% of respondents stating that they were using their cars less.

Smithers added: “For the vast majority of people, money is tight or very tight. Keeping tight control on all motoring costs is vital for everyone.”

Cultural issues

Research from Redtail Telematics published in July 2022, which surveyed 2,000 UK adults, revealed that a lack of communication from insurers on the cost savings associated with telematics technology was leading to missed savings for insureds.

Providing consumers with cheaper premiums while being able to ensure better loss results seems like a win-win for both customers and the insurance sector – so why hasn’t telematics overtaken the traditional way of pricing insurance annually?

Partly driving the lack of telematics uptake is culture. In the UK, telematics devices are most often used to provide discounts to new drivers, while also providing an educational function for this more risky class of customer.

Dan Venner, head of distribution for personal lines and protection at Covéa Insurance, explained: “The main penetration for telematics is young drivers at the moment – the problem that it probably has is that it’s a reluctant purchase.

“Most people don’t really want a device tracking them, but for young drivers, it’s their only affordable way to get insurance.”

Munro added that the cost of living crisis could see telematics become much more popular across different customer groups as consumers seek out savings.

This contrasts to conditions during the Covid-19 pandemic, he explained, when these types of savings were less obvious for consumers.

The fact that less people were driving during the pandemic lockdowns meant that many motor insurers reaped increased profits and reduced claims costs – in turn, this meant they had the financial wiggle room to offer higher risk customers competitive rates.

Munro continued: “As premiums go up, then [customers are] going to shop around a bit more.

“If you’re a good driver and you see that you can save yourself 30% on your premium that has gone up significantly over the past few months, then I’m sure we’ll start to see more customers getting telematics devices fitted.”

Venner added that the way to increase the adoption of telematics was to “sell it from a more positive customer angle, not from a customer policing angle”.

He explained: “We need to tell customers about the benefits telematics can provide, including – most importantly – a cheaper premium, rather than it being Big Brother watching you.”

Another benefit of telematic policies is allowing drivers to make better decisions. Blackham added: “We want to use telematics to incentivise, rather than punish, by giving drivers all of the information to make better and safer driving decisions.”

In addition, telematics can encourage consumers to think about the ecological impacts of driving.

For example, By Miles’ aforementioned customer survey found that its app, which allows members to preview the cost of insurance for a specific journey, made consumers using telematics technology more environmentally conscious.

Cost saving solution?

As the cost of living crisis bares its fangs, the cost savings of telematics-based motor insurance policies are sure to become more attractive to consumers looking to save money where they can.

Whether or not these savings will entice significant amounts of customers to purchase these policies – and overcome their biases against being monitored – remains to be seen, although uptake may also depend on the insurance industry advertising the benefits of telematic technology more effectively.

Despite the savings telematics can provide, Venner was suspicious that these policies could be a silver bullet solution for all customers.

He said: “The bit I worry about is that the people who are going to struggle the most with [the] cost of living are maybe the same people that can’t change their driving patterns.”

Venner gave the example of a care worker who uses their vehicle to visit different patients, making the point that they would most probably be feeling the pinch of inflation, but also wouldn’t be able to benefit from driving less or at safer times.

“If you give someone some benefits, there’s always going to be other people that it doesn’t benefit,” he noted.