The ultimate guide of connected car insurance

Connected car insurance generates many questions and debates. But what is exactly connected insurance? What are the characteristics of a connected insurance program? How does it work? How to connect customers? What are the technologies available on the market? What are the benefits of connected car insurance? This guide adresses all of these questions.

We help you to understand the realities of connected insurance, the specificities of Pay-As-You-Drive and Pay-How-You-Drive programs as well as the characteristics of new connected services, such as crash detection and eco-driving tips. We also compare the technologies available on the market and explain why smartphone telematics is the right choice for insurers. 

What is connected insurance?

Definition

Connected insurance is defined as a transformative shift within the insurance industry, where traditional methods are being enhanced and upgraded by digital technologies. This evolution involves the incorporation of new digital tools, such as IoT devices, mobile apps, and advanced data analytics, into all insurance processes including underwriting, claims management, customer loyalty and prevention.

A diverse range of applications

The whole insurance industry is impacted by the rise of connected insurance. In home insurance, IoTs including smart water leak detectors, humidity sensors or motion sensors have become strategic to prevent and mitigate risks. In health insurance, connected medical devices (wearables) and monitoring apps have been widely adopted by insurers and customers.

In car insurance, connected insurance has led to the emergence of connected programs:

• Usage-based insurance (UBI), also known as Pay-As-You-Drive and Pay-As-You-Go.

• Behavior-based insurance, also known as Pay-How-You-Drive.

Zoom on usage-based insurance

Historically, a policyholder's premium is based on declarative criteria. It includes age, gender, driving history, yearly mileage, family status, the place of residence and park, business use of the vehicle, named drivers and so on. All this information is used by underwriters to assess the average risk profile of the policyholder based on actuarial modeling. 

How UBI works

Usage-based insurance involves a different approach. The policyholder's premium isn't based on the average risk profile. It's based on the mileage covered by the vehicle (pay-per-kilometer) or the driving time spent behind the wheel (pay-per-minute).

To collect the mileage, or precisely determine the driving time, three solutions are available on the market:

• The driver is required regularly to send pictures of the vehicle's odometer. This is the system deployed by Flitter, that asks policyholders to send a photo of the odometer once a year.

• A mobile app that automatically, and without any action required from the driver, collects the mileage of the car or the time spent driving by exploiting phone' sensors. Groupe Maif opted for this solution.

• A connected box or OBD dongle.

Pricing and target

In usage-based insurance products, a policyholder's premium is determined by two specific parameters:

• a minimum monthly cost

• an additional cost per kilometer driven or per minute driven

Pay-As-You-Drive programs are designed for short-distance drivers (under 6 000 kilometers per year), owners of classic cars, and owners of a second or third car who occasionally drive.

Zoom on Pay-How-You-Drive insurance

Pay-How-You-Drive, also referred to as behavioral car insurance, is a car insurance product that matches rates with the level of risk. A tool inside the car, a mobile app or a specific device, analyzes the driver's driving behavior. Based on the demonstrated safe driving habits, the insurance company offers a discount to safe drivers. 

How Pay-How-You-Drive works and pricing

Pay-How-You-Drive programs analyzes the driving style of the driver. 

• The policyholder downloads a mobile application or go to a garage to install a telematics device in the car.

• When the policyholder drives, the mobile app or the device automatically collects driving events including speedings, brakings and cornerings. Mobile app can also detect distracted driving events.

• Once the trip is over, a safety score is attributed to the trip. The driver can check its score in the insurer's mobile app. 

Based on the policyholder's driving score and his level of safe driving, the premium is adapted to match the real level of risk. The better the score, the lower the insurance premium. In fact, if a driver reaches a 9 out of 10, it means that his driving behavior is very safe. He is considered as a low risk driver and thus pays a lower premium. Conversely, if a drive gets a score of 3 out of 10, that means that he is a high-risk driver. Therefore, his premium won't be reduced.

Pay-How-You-Drive programs target all drivers. From high-risk drivers to low-risk drivers, all of them can benefit from a Pay-How-You-Drive program:

• High-risk drivers will improve their driving style overtime to reduce their premium.

• Low-risk drivers are rewarded to drive safe.

In both cases, insurance companies improve their loss ratio because they create a safer world with less frequent and less severe car accidents.

Why is smartphone telematics the right tool to launch a connected car insurance program?

Many technologies are available on the market to launch a connected car insurance program.

Connected boxes 

Connected boxes are old-fashioned devices. This technological solution has shown many limits including:

• Cost (hardware being expensive),

• Logistics (insurers must buy, stock and deliver the boxes to their customers),

• Installation complexity (policyholders need to go to a garage to install the box),

• Support (the policyholder doesn't receive the box or it stops working),

• Transparency of the data collected (user privacy).

The customer experience is negatively impacted by these elements.

Connected vehicles

Connected vehicles generates a lot of expectations. However, for now, reality doesn't match expectations.

• The absence of standardization renders large-scale data processing impossible. Here is a snippet from our study dedicated to connected cars data: "The data collected and stored by manufacturers does not yet incorporate standards to ensure that the parties involved in the value chain can access and use the data seamlessly. Every car manufacturer has a data management system designed to optimise its services. However, these systems are not intended to be accessible to other stakeholders."

• Connected car data is expensive, with original equipment manufacturers (OEMs) determining the prices without regulatory oversight.

• Connected cars don't detect phone distraction (also called distracted driving), which is a critical factor in road risk.

Smartphone telematics

Smartphone telematics emerged in the 2010s and has been on the rise since then. It has many benefits that outperforms any other technology available on the market.

• Scalability: it is a universal solution. Customers simply need to download a mobile application to start analyzing their driving behaviour. 

• Reliability: There are more than 12 million active mobile telematics policies in the US, and more than 20 million active mobile telematics policies worldwide.

• Data standardization: the data transmitted can be standardized and is therefore easily exploitable by insurance companies on large scale.

• Distracted driving: smartphone telematics is the only technology that detects distracted driving, a critical road safety factor.

• Transparency: mobile-based connected car programs are 100% GDPR compliant. Users know with certainty the type of data their mobile phone collects to analyze their driving. 

Beyond driving analysis, smartphone telematics is also the opportunity for insurers to launch new connected services including: 

• Crash detection, a life-saving feature (see how it works),
• Coaching based on real driving behavior,
• Road safety programs through driving challenges,
• Targeted assistance.

All of these services contribute to delivering a high quality customer experience. Moreover, smartphone-based connected insurance generates new touch points (monthly score report or monthly mileage report) and dialogues between insurers and their customers. That results in better retention rates and higher customer satisfaction.

Additionally, smartphone-based connected insurance offers an extra added-value service that truly makes a difference: eco-driving.

Eco-driving: the game-changing service

Connected car insurance can also encourage responsible car usage, reduce CO2 emissions and provide incentives for a more environmentally friendly mobility approach.

Let's take the case of usage-based insurance. The more a policyholder drives, the higher his insurance premium. Therefore, policyholders choosing a Pay-As-You-Drive insurance program will minimize as much as possible their car usage to save money.

Regarding Pay-How-You-Drive programs, the better a policyholder drives, the less he pays. Considering that the safest drivers tend to engage in eco-friendly driving practices, the policyholders will readily embrace eco-driving tips to reduce their premiums.

Beyond the pure financial benefits, the adoption of eco-friendly driving practices benefits the environment. In a data-driven study based on data collected by the DriveKit SDK, it is said that eco-driving practices contribute to reduce CO2 emissions up to 15%. This is a strategic asset for insurers given the requirements of the new EU Corporate Sustainability Reporting Directive (CSRD). According to this legislation, insurers will have to produce sustainability reports by the end of 2025. That means that insurance companies must act now to produce strong sustainability reports, get a green light from the EU ad avoid public backlash. 

Actively promoting environmentally conscious driving habits provides insurers with a quick and effective method to demonstrate their commitment to combating climate change and decreasing CO2 emissions.

It should also be said that younger generations including Generation Z are very sensitive to these aspects. According to Accenture, 67% of young people under 18 years of age prefer experiences that promote sustainability. Therefore, insurance companies will gain from encouraging eco-driving practices to their customers. Mobile telematics is the only affordable technology capable of consistently measuring drivers' progress over time.

Conclusion

Connected car insurance promotes a new approach to road risk. Road risk is no longer based on traditional criteria but on factual, quantitative criteria such as mileage (pay-per-kilometer), driving time (pay-per-minute) or driving behaviour (Pay-How-You-Drive).

Among all of the technologies available on the market to power connected insurance programs, smartphone telematics is the most relevant tool for many reasons. It's a device-agnostic solution. Software deployment is easy and less expensive to manage compared to the logistics generated by hardware devices. It is the only technology that detects distracted driving while offering connected services including crash detection and eco-driving practices. Finally, smartphones-based services including driving challenges contribute to generate new touch points between insurers and their customers.