Telematics Data: A Step-change Improvement Over Traditional Insurance Factors

Knowing how, how much, when and where vehicles are operated provides an opportunity for a step-change improvement in assessing risk.

For the past 10 years, I led the team responsible for developing the DriveAbility Score which has 3 to 4 times the predictive power of any traditional insurance rating or underwriting factors. That analysis demonstrated that a significant percentage of insureds’ premiums are incorrect by +/-50% and the majority of insureds’ premiums are off by more than +/-10%. Whether an insurer is using a third-party score or their own proprietary score, the insurer will gain a significant competitive advantage assuming the telematics risk score was built appropriately. On the other hand, if an insurer doesn’t leverage telematics or uses a substandard score, they could see their profitability deteriorate due to adverse selection.

Insurers just getting into telematics need to rely on a third-party telematics risk score. Unfortunately, it is impossible for insurers to test the validity of a third-party risk score on their own book of business unless they have already collected telematics data (which is not usually the case). In the absence of that:

- Don’t use a score developed judgmentally (i.e., without crash or claims data)

- Ask how many claims were used in the development of the score

- Don’t believe aspirational statements about “lift” unless you can review actual results

- Check to see which states have approved the score for use by insurers

- Inquire about the applicability of the score to different coverages

- Ask about potential interactions of the score with traditional rating factors

- Monitor early results to determine if your distributions are similar to those of the lift charts

- Track frequencies as an early proof point until data volumes are sufficient to test loss ratios

If you would like more information about telematics risk scores and/or assistance selecting a third-party vendor, please contact Werner Advisory LLC.