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Are smart boxes the future of car insurance?

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Telematic units, also called black or smart boxes, are devices installed in a car to monitor a driver’s behavior (speed, acceleration, deceleration, …). They are increasingly used by insurance companies to develop a pay-as-you-drive pricing. Such pricing may be especially interesting for young drivers who are hit by high insurance premiums.

Young drivers are victims of their youth

One metric sums it up all: 25% of accidents are caused by young drivers. This is quite a powerful statistical fact, shared in almost all markets, that has led insurer to impose very high prices in young drivers.

Mobile apps vs. telematics units

There are two types of technologies on the market : mobile apps and telematics units. Mobile apps are popular with low-cost insurances, but not only. Axa Belgium launched its app in late February. Telematic units have generally been adopted by those who really want to use the smart box for analytical purposes.

The reason is simple and it’s all about precision. The precision of mobile apps is constrained by the precision of the smartphone (GPS, accelerometer) and it’s generally not good enough. A few meters can actually make a very big difference when you want to understand what went wrong after an accident. Telematic units, which are supplied by third parties like Octo Technologies, provide much better precision and are designed to meet insurances’ aims.

In short, mobile apps are more of a marketing tool than a real analytical device.

Cultural differences

In Belgium, AG insurance has carried out a first small-scale test with employees. It’s not clear however whether they will continue with this technology. Smart boxes suffer an adoption problem in Belgium and in other countries where it’s perceived as an intrusive system. Moreover the market structure plays also a role on the adoption. In Belgium for instance 60% of the insurance market goes through brokers ; in France 50% of the market goes through “mutualities”, large organizations with enormous bargaining power.

The absence of direct relationship makes it difficult for an insurance company to have much bargaining power on the end-customer. As a consequence the end-customer lacks the incitative to accept the smart box.

The situation is different in the US and in Italy. With an estimated 4m boxes, Italy can be considered the most equipped country and there is a cultural reason for that: fraud! The risk of fraud has led Italian insurance companies to raise prices and the smart box is the only way for honest people to pay normal prices.

Conclusion

We believe mobile apps proposed by insurance companies to monitor drivers’ behavior serve a marketing and communication strategy rather than a Big Data and pricing strategy.

Insurance companies which are serious about analyzing data go for smart boxes. But the latter suffer a real adoption challenge in most countries. Moreover recent experiments show that the presence of the smart / black box is not a perfect predictor of risk and eventually won’t serve much to determine pricing. Other data collection devices will be required to enrich the risk prediction model.

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Author: Pierre-Nicolas Schwab

Pierre-Nicolas est Docteur en Marketing et dirige l'agence d'études de marché IntoTheMinds. Ses domaines de prédilection sont le BigData l'e-commerce, le commerce de proximité, l'HoReCa et la logistique. Il est également chercheur en marketing à l'Université Libre de Bruxelles et sert de coach et formateur à plusieurs organisations et institutions publiques. Il peut être contacté par email, Linkedin ou par téléphone (+32 486 42 79 42)

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