Vehicle Telematics: Risk Management at Every Turn

Steven C. Craig


June 1, 2010

As technology has advanced over recent years, vehicle telematics has evolved from an expensive track-and-trace system to a sophisticated, affordable way to manage vehicle fleets. Developments in consumer technologies such as cell phones, computers, wireless networks and GPS navigation systems have given vehicle telematics refined functionality that fleet operators and risk managers only dreamed of 10 years ago.

Modern telematics devices combine GPS, WiFi, cellular communications, Bluetooth, three-axis accelerometers and even video into small, sleek packages that gather raw driving behavior data that can then be overlayed with geographic information systems (GIS) mapping data, such as road type, weather and speed limit. These devices continue to gain acceptance in the marketplace while hardware and data subscription costs continue to drop. Now more than ever, telematics can be a useful tool.

Telematics devices offer fleet operators and risk managers insight into driving behaviors, including the ability to recognize good drivers, identify risky drivers who should not be behind the wheel and develop training programs for those who need improvement. This can help fleet operators save 10% or more on fuel costs by reducing the time vehicles are left idling, managing the routes taken and monitoring the behavior of aggressive drivers on the road.

Moreover, installing telematics systems into vehicle fleets can not only help to reduce the number of accidents by 20% to 30%, but they can increase operational efficiency by at least 10% through improved logistics, back-office administration, maintenance schedules and fewer vehicles out of service for repair.

Though initially plagued by privacy concerns, employers have seen driver attitudes toward these devices shift from one of suspicion to one of acceptance and value. Many drivers initially assumed companies were adopting the technology as a way to spy on employees or policyholders, evoking fears of Big Brother surveillance. Today, however, many drivers see the value such data can provide-including safety benefits, teen programs, premium reductions and emergency assistance, among others.

Some commercial drivers have also experienced how telematics can help them demonstrate good driving skills and superior customer service. Employers can use the data gleaned from telematics devices to defend their drivers from accusations of speeding, aggressive driving or late deliveries by verifying an employee's arrival at a specific location. Additionally, it allows drivers to schedule appointments in alignment with customer expectations and helps employers eliminate the unauthorized use of vehicles, which can save some fleets up to $900 per vehicle in the first year.

In fact, several studies show that drivers are likely to modify their behavior after a telematics device has been installed in their vehicle. According to the 1995 SAMOVAR Drive Project by the European Union, the most widely cited study of telematics devices in the world, accidents declined 28% after the devices were installed. Fleet surveys by major insurance carriers have demonstrated a 30% reduction in crashes when monitoring engine data and a 20% reduction when using GPS data. Furthermore, a 2007 insurance carrier's fleet survey showed a 37% accident reduction when monitoring driving time and a 15% reduction when monitoring speed.

Risk managers are especially mindful of the safety benefits of telematics through speed reduction. "An enormous body of evidence consistently supports that the risk of crashing, being injured, or being killed increases with increasing speed," wrote Dr. Leonard Evans in his book Traffic Safety. "For fatalities, a 1% increase in speed appears to increase fatality risk somewhere in the range of 4% to 12%, with stronger support for a value towards the low end of the range."

Telematics also plays a large role in improving fraud prevention and theft recovery-for both the vehicle and (in commercial use) the payload being transported. The data can help fleet operators prove that their vehicles were not at the scene of an accident, ensuring the company is not party to false accident claims. Additionally, vehicles with telematics devices can be more easily recovered because of GPS/GIS technology that has the ability to immediately notify police.

Evaluating the Impact on Insurance
Insurance carriers have shown a particular interest in the way telematics' employs cutting-edge technology and analytic methods to collect, analyze and convert raw data into practical information. As the technologies have permeated the auto insurance sector, insurers and risk managers have begun the process of segmenting driving behavior and developing new individual pricing strategies based on actual behavior.
Those efforts have yielded new insurance products such as Progressive Insurance's MyRate program, which monitors driving speed, distance, time of day and hard starts/stops and is based on 17 years of research and 10 years of production.

Other carriers are also using telematics devices to monitor teenage driving habits to better assess and price risk. The data collected through these programs has also been used to encourage safe driving by alerting parents when a teen engages in unsafe behavior, such as aggressive driving, speeding or failing to wear a seat belt. American Family's TeenSafe Driver program, for example, monitors extreme driving events with two video cameras.

To address lingering privacy concerns, such programs are "opt-in" choices for policyholders. In fact, privacy concerns keep some carriers from entering the usage-based insurance market, which can prove to be a potential differentiator in the highly competitive personal and commercial automotive insurance business. However, a 2008 Diamond Management & Technology Consultants survey showed that 77% of respondents were willing to install a risk monitoring device to collect real-time information about their driving habits if the device could help reduce the likelihood of an accident or was offered in conjunction with a safe-driving discount.

While such programs are still in their early stages, they are expanding nationwide. Carriers that quickly implement the advanced technologies are poised to gain a significant competitive advantage, with better risk selection through more systematic segmentation. And those carriers and risk managers that leverage the new data into next-generation scoring models and analytics will have the opportunity to capture considerable market share.

Some carriers have begun to see the benefits of a telematics program at both the underwriting and claims levels. Underwriters can price risks more accurately by using previously unavailable information regarding driving habits, location and vehicle information, including:

  • average trip speed

  • estimated percentage of time traveling at more than 15 mph over the posted speed limit

  • aggressive acceleration, braking, lane changes or cornering

  • driving patterns such as time of day, trips per day, miles traveled, percentage of time spent idling versus moving, etc.

  • geographic location where car is driven most often

  • alternate garaging locations

  • teenage driving habits (e.g., distance traveled away from home)

  • current, accurate odometer readings

On the claims side, claim departments have seen loss reductions of 20% to 30% when telematics devices are installed. Known as a "halo effect," this outcome can generally be attributed to the driver feeling as though his or her individual performance is being monitored. As such, the driver consciously or unconsciously modifies behavior, resulting in significantly reduced crash frequency rates.

Data from telematics devices can also help improve claims handling from the initial event throughout the life of the claim. For instance, telematics data can help locate stolen vehicles and provide improved communication with emergency responders-either automatically at the point of an extreme event (e.g., an airbag deployment) or at the driver's option when roadside assistance is necessary (e.g., flat tire, fuel refill, towing, etc.). Similarly, by receiving immediate accident alerts, carriers, adjusters and agents can quickly and properly send the vehicle to an authorized repair facility-cutting the cost of towing and storing the disabled vehicle and reducing rental car expenses. Improvements in both speed and accuracy of the reserving process may also be possible.

Vehicle telematics has rapidly evolved over the last few years, enabling companies and fleet managers to generate valuable information regarding the interactions between already collected data and that which is transmitted from devices. As the technology continues to grow and gain acceptance among drivers, those fleet operators, risk managers and insurance carriers that embrace the new high-tech wave will be well positioned to gain a significant competitive edge in the marketplace. Though vehicle telematics alone will never prevent each and every accident within a fleet, the combination of new technology with traditional risk management will undoubtedly lessen such costly risks.
Steven C. Craig is a general manager at ISO, responsible for the Applied Informatix unit.