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The Telematics Advantage: Growth, Retention and Transformational Improvement with Usage-Based Insurance

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With its ability to monitor vehicle driving behavior and communicate back to the insurer with detailed data, telematics and usage-based insurance is fostering new and innovative products that more …

With its ability to monitor vehicle driving behavior and communicate back to the insurer with detailed data, telematics and usage-based insurance is fostering new and innovative products that more accurately price risk and attract profitable new customers.

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  • 1. • Cognizant 20-20 InsightsThe Telematics Advantage: Growth,Retention and TransformationalImprovement with Usage-Based Insurance Executive Summary data. Early adopters are already reaping signifi- cant benefits from this wave of change. We are now in the early stages of the next disruptive shift in work and technology, with a Telematics is defined as machine-to-machine com- powerful economic catalyst sweeping across munication, whereby a device plugged into the industry. As a result of new, cloud-powered on-board diagnostics (OBD) port of a vehicle, or technologies, change is coming at an ever- originally installed by the manufacturer, collects accelerating pace, particularly as the millennial particular data and sends it via wireless com- generation comes of age and sees few barriers to munication to the insurance carrier to derive the way technology can empower individuals and meaningful and predictive insights about how indi- businesses. viduals drive. The rise of millennials, along with the globaliza- For some carriers, telematics data provides the tion of markets, the virtualization of business basis for understanding how far, how fast and processes and emerging social and mobile tech- under what conditions a person drives, as well nologies are redefining how work will be done as a foundation for more sophisticated data today and tomorrow. As companies seek to match modeling and scorecard development. This ability the Sunday night experience of mobility, col- is fostering new and innovative products that laboration and social networking with Monday more accurately price risk and attract profitable morning, these striking changes require orga- new customers, making the traditional segmenta- nizations to rethink and rewire every aspect of tion of pricing auto insurance — based on average their operations.1 While some companies are still characteristics or certain populations’ gender or on the sidelines, others are examining every facet age — completely obsolete. of their business model and are adapting “new ways” of working that are more automated, col- In addition to pricing, telematics and usage-based laborative and virtual. insurance (UBI) approaches are introducing opportunities for carriers to build and maintain Within the insurance industry, change has come richer relationships with customers than ever slowly and predictably over time — until now. One before, while also laying the foundation for better new technology that has the potential to bring decisions and core business process optimization. significant change to all aspects of the insurance This white paper lays out how telematics and UBI business is telematics, with its ability to monitor are revolutionizing rating variables and discusses vehicle driving behavior and communicate back the potential they have for significantly changing to the insurer with extremely rich and detailed or eliminating claims processes and workflow. cognizant 20-20 insights | january 2012
  • 2. It also offers actionable advice on how insurers device prices, which have declined to about $100 can begin integrating these technologies into their and continue to drop. IT infrastructure by examining a new managed services approach that we have recently launched Telematics insurance products are offered as in partnership with Evogi Group, a leading provid- opt-in programs by insurance companies in er of usage-based and behavior-based software various forms of UBI, either as commercial- solutions to the insurance industry. ized products or trial offerings (see Figure 1). Additional carriers are expected to begin UBI Telematics Pioneers market tests this year through 2017, according One leading carrier, Progressive Insurance, has to Towers Watson. In fact, Towers Watson reports over a decade’s headstart with telematics. Its that 18% of U.S. personal and commercial auto patented “Snapshot” program is already rolled carriers use or are planning to use telematics in out, with enrollments increasing to 50,000 new the next two years. In addition, the LexisNexis policyholders a month in 39 states. As such, Risk Solutions Survey (2010) indicates that 75% Progressive has proved the of potential customers are interested in the cost savings that can be achieved via UBI. Telematics-based acceptance and scalability of UBI in the U.S. insurance products While large carriers have the capacity to fund and establish telematics pilot projects, many are now being Other carriers are following others are challenged to build a business case suit with UBI products, teen-explored by personal driver safety programs or and are launching projects to determine theand commercial lines a mix of UBI and behavior- impact on product cost, as well as the effect on selection, retention and acquisition of customers. insurers to provide al-based insurance (BBI) In addition, the U.S. telematics market is the programs, as well as added policy discounts services to prevent their largest in the world and will remain so, at least and enhanced risk best customers from being through 2017. management. poached by competitors. Usage-based insurance has social advantages, Telematics has been around for some time. In the as well, and is promoted as a green initiative early days, it was used primarily by corporations to since it has the potential to reduce miles driven govern fleets for improved safety and efficiency. and, hence, emissions. In addition, UBI has been Telematics-based insurance products are now shown to reduce the frequency and severity of being explored by personal and commercial lines accidents, according to a review of available data insurers to provide policy discounts and enhanced by the National Highway Transportation Safety risk management. This has been made possible Administration (www.NHTSA.gov), by reducing by the reduction in data transmission costs and the speed of travel and the number of vehicles on the roadway. The U.S. Competitive Landscape Market Tests Mass Market Segmented Offerings Other Offerings Employees and Offerings Launched products Commercial, asset existing customers Launched products for teens recovery, etc. Farmers Insurance AAA Safeco Insurance Geico MetLife State Farm Insurance 21st Century Liberty Mutual Years of Experience Unigard OnStar Insurance State Farm Insurance <3 Plymouth Rock Allstate Erie Insurance Travelers Nationwide The Hartford GMAC Insurance 3-6 American Family OnStar Insurance >6 Progressive Source: Towers Watson, March 2011 Figure 1 cognizant 20-20 insights 2
  • 3. Creating a New Telematics Product of policyholders who prefer to use a handheld device for anytime, anywhere communication.Building a new telematics-based insuranceproduct can be complex. It begins with the desired While the complexity of establishing UBI as astrategy of the insurer and impacts the selection rating tool may appear significant, the benefitsof the telematics device(s), the desired analytics are extensive, as emerging technologies collectand the required integration with the insurer’s an expansive amount of data beyond mileage.operating systems. It also necessitates a close This information can be used to create value-assessment of the potential impact the technolo- added services, while increasing pricing accuracy,gy may have on underwriting and actuarial rules, reducing claims leakage, reducing loss costs and,billing, marketing and distribution, as well as the therefore, lowering expenses. Areas of greatestclaims process. Other considerations include: impact and potential redesign include:• How will the insurer collect, aggregate, • Fraud reduction. normalize and use the data for risk selection and pricing? • Stolen vehicle recovery. • Pricing accuracy/adequacy.• What information, and in what format, will be • Lower acquisition costs. provided to policyholders to easily monitor their driving behavior? • Improved renewal retention.• What requirements will be necessary to • Improved liability determination. integrate telematics into the insurer’s • Improved accident investigation facts. operations and core systems? • Kinematics reconstruction.• How will insurers support fulfillment and UBI • Reduction or elimination of towing charges. customer care? • Automated repair processing.• What are the economic considerations, and • Automated first notice of loss (FNOL) and how will the insurer account for ROI? triage of claims.• What device(s) are compatible with my policy- • Automated reserving. holders’ vehicles? • Automated bodily injury estimation.• How can insurers create a pilot program? • Automated physical damage estimation.Telematics Benefits, Potential ROI • Automated claims management.Since most carriers are still in market tests • Automated subrogation recovery.and seeking to operationalize UBI and/or BBI Claims Impact of Telematicsprograms, it will potentially take them at least 12 As insurers continually examine their claims effi-to 18 months to move into full production from ciencies, including technologies, branding andthe start of a pilot. This foundational focus will customer care, while striving to leverage analyticscontinue throughout this year, into next year for improved decision-making, telematics has theand beyond. Companies that are first adopters potential to bring the most significant transfor-will move on from operationalizing a telematics mation to date to insurance operations.program, to exploring further applications fortelematics data. With the communication of behavioral and geospatial data from the vehicle at the time of anThis next wave will produce even more significant accident, telematics can enable real-time FNOLchange in the insurance industry, as predictive and first report of injury (FROI) reporting. Byanalytics can be deployed to enhance decision- creating deeper predictive analytics and triggersmaking, reduce costs and eliminate manual for crash data and bodily injury assessmentsprocesses in the claims arena, while bringing from similar incidents, insurers can potentiallytransformation and innovation to the insurance streamline the front-end of claims reporting. Byenterprise. doing so, they can reduce their loss expenses,As the use of predictive modeling in underwriting while employing better triage of claims, potential-has accelerated, these models will be increasingly ly realizing a reduction of 20% to 50% or more inapplied to improve claims accuracy. As a result, claims expense over time.and in addition to streamlined processes, the Telematics data can also improve frauduse of mobility solutions will increase across the monitoring by augmenting fraud data modelsenterprise to accommodate a new demographic with crash monitoring data to recreate scenarios cognizant 20-20 insights 3
  • 4. and detection of false claims. Applied to claims value-added services. These include emergency processes, analytics can help reduce fraud by roadside assistance, stolen vehicle locator, spotting the elements of a claim that indicate vehicle diagnostics, speed alerts, real-time driver a higher propensity for fraud. In the U.S., for feedback and driver training programs, teen example, the National Insurance Crime Bureau driving alerts, safety monitoring for cell phone suggests that 10% of all property and casualty use and texting and geo-fencing. claims are fraudulent, yet only 20% are detected. In short, a case can be made that an insurer will Telematics will, Understanding crash data with more accurate assessments will get a favorable ROI from a telematics device with proper installation, selection and use of data in time, introduce provide better triage of claims as and the addition of value-added products in itsmore accuracy and a result of more detailed accident strategy. change workflow information received by the carrier, thus improving insights ‘UBI in a Box’entirely, delivering into which claims incur increased To achieve these benefits, most insurers will find significant ROI loss adjustment expense (LAE). it necessary to enlist the services of a partner over time. Having crash data willby receiving estimate reserves also improve with experience in developing and deploying end-to-end UBI products. An experienced partner detailed accident characteristics and thus stream- providing strategy consulting and end-to-end lining the efficiency of the investigation and adju- solutions — including device selection, pilots, dication process, further reducing LAE. field tests, fulfillment, support, actuarial services, integration, predictive analytics, claims solutions For example, by obtaining UBI, BBI and geospatial and insurance domain expertise — is more likely data elements, a vehicle can call in the FNOL to understand the technological and business and potentially trigger automated subrogation process nuances of telematics, to mitigate the recovery or engagement of the tow and repair risks and accelerate time to value. shop, thus reducing downtime, tow charges, impound fees and rental car costs. Moreover, total One way to approach this is with an end-to-end claims costs will be further reduced by utilizing an solution that is delivered as a managed service automated estimation of the costs of repair and and spans strategy consulting, evaluation, field streamlining the repairs by analyzing data of the pilots, integration of data into core systems, fulfill- needed auto parts and enhancing fulfillment of ment and help desk/customer care and advanced those parts. predictive analytics. With Evogi Group, we have created a “UBI in a Box” service. Evogi provides As the delay in receiving notice of loss leads to the integrated data hub to collect, normalize and higher costs, the delay in adjudication and using apply analytics to UBI data for better decision- subjective elements further contribute to leakage. making, while we provide a private cloud service Telematics will, in time, introduce more accuracy to deliver (at scale) technology, as well as domain and change workflow entirely, delivering signifi- and business process expertise to carriers. cant ROI over time. Working with us, carriers can better manage the As on-board telematics devices can produce complexity and moving parts of a UBI initiative enormous amounts of valuable data, its persistent (while applying a unique strategy for competi- connectivity in the event of a claim can yield tive advantage). By taking a managed services tremendous benefits in quickly and efficiently approach, they can limit the number of vendors assisting with managing the claims process. and costs associated. Our solution enables These new developments are especially timely, carriers to begin with an evaluation and pilot as the ranks of experienced adjusters are retiring. before going live with a UBI service. A limited number of devices can be deployed as an internal Added-Value Services pilot for the carrier to familiarize itself with the With a UBI program, the carrier obtains the data program, while further developing its strategy and the opportunity to improve the risk character- and roadmap before offering UBI to policyholders. istics of its book of business, while the policyhold- er receives a premium discount or the promise Innovation and business strategy units are well- of a premium reduction. However, telematics can served by assessing telematics in a pilot environ- also enhance revenues for insurers and increase ment, while creating a blueprint for a successful the stickiness to the insured by easily attaching UBI roadmap. This will allow them to further the cognizant 20-20 insights 4
  • 5. alignment of all program partners and define incidents decreased by 12% and idling by 35the roles and responsibilities of stakeholders. In minutes per vehicle, per day.addition, this approach allows for testing priceand segmentation capabilities and value-added Similar types of benefits could be accrued byservices, reviewing the functionality of the output insurers. In addition to monitoring drivers forand integration steps, while providing additional safe driving habits, agents could more effec-organizational orientation and agent training. tively manage risk and offer policy discounts toA pilot environment enables carriers to build a customers.brand around the use of telematics in advance ofthe launch of a UBI program. Deployment of UBI and Competitive AdvantageImproved Economics in As carriers work through their approach to rollingCommercial Fleets out UBI programs in personal or commercialCalculating ROI in a commercial program may be lines, they will need to consider their strategiceasier to establish than in personal lines; however, objectives, desired competitive advantagesthe long-term results for early adopters of a UBI and ways a connected vehicle will impact theiror commercial program will change over time. business processes.For example, a 105-vehicle fleet had determined By integrating telematics data into core systems —that both revenue per employee and revenue policy administration, actuarial and underwriting,per unit (vehicle) decreased each of the past billing and claims, as well as new action-orientedfour years. The ratio of hours billed to hours paid policyholder portals — more predictive and fastereroded, as well. (Because of the economy, pricing decisions can be made, perhaps even in real-time.per hour and per move are both flat except for Manual and time-intensive work can be stream-a per-mile fuel surcharge.) As a solution, the lined or eliminated as processes are automatedtelematics program was initiated, resulting in the with accurate geo-spatial and vehicle data. Thisfollowing improvements: will have a noticeable impact on loss ratios. As more data is collected and analyzed over time,• The hours-billed-to-hours-paid ratio improved, more quantifiable savings will be determined as actual travel time began to conform with and verified — benefits that will accelerate with estimated travel time. greater UBI program adoption rates.• Specific to office moves (primarily weekend and evening work), return-to-office trip time The Future is Now decreased by 50%, resulting in $13,000 of Telematics has arrived. Its speed of deployment improved productivity in the first 90 days. will continue to accelerate, but there are limited available resources to deploy to make it work• The company essentially eliminated side-trips and other non-optimal route selections. effectively within your organization. Speed matters. Thus the fastest, most complete route• By ranking the drivers by company (by number to telematics adoption will produce a competitive of speeding incidents, hard brakes, hard advantage. accelerations and excessive idling), speedingFootnotes1 Malcolm Frank and Geoffrey Moore, “The Future of Work: A New Approach to Productivity and Competitive Advantage,” Cognizant Technology Solutions, December 2010, http://www.cognizant.com/futureofwork/assets/whitepapers/FoW-New-Approach-TL.pdf.Resourceshttp://www.nhtsa.gov/Research/Event+Data+Recorder+(EDR)/Welcome+to+the+NHTSA+Event+Data+Recorder+Research+Web+site This Internet Web site is another Event Data Recorder (EDR)-relatedeffort to promote the understanding and widespread use of these devices. It is designed to be a usefulresource for anyone seeking knowledge of the emerging highway-based EDR technologies. By sponsoringthis effort, NHTSA encourages dialogue, research and development in emerging EDR technologies, withthe goal of fewer crashes, injuries and deaths. cognizant 20-20 insights 5
  • 6. Robin Harbage, “The State of Insurance Telematics in 2011,” Towers Watson, Sept. 8, 2011.iSuppli Corp., isuppli.com, 2011.Progressive Insurance, www.progressive.com, 2011.“LexisNexis Risk Solutions Survey,” LexisNexis, 2010.National Insurance Crime Bureau, NICB.org, 2011.About the AuthorsKimberley J. Gunther is Telematics Practice Leader within Cognizant’s Insurance Practice. She is respon-sible for assisting clients in developing a telematics strategy, as well as the company’s “UBI in a Box”offering. She provides leadership in business strategy and solution development in telematics as anemerging technology as part of Cognizant’s Future of Work initiatives. Kimberley has over 30 yearsof business experience, with specialized skills in developing solutions across the insurance lifecycle toimprove business results. Her insurance career began as a licensed claims adjuster and in underwriting/loss control in personal and commercial lines. Subsequently, she has provided thought leadership andstrategic solutions in insurance core systems, technology and claims BPO. Before joining Cognizant, sheserved as President of a claims third-party administrator and as Chief Insurance Industry Consultant,Vice President of Sales, Chief Marketing Officer and VP of Alliances for a global technology firm.She holds a B.A. in Business, Organizational Behavior, cum laude, Bethel University, St. Paul, and hascompleted graduate studies in business administration from Regis University, Denver. Kimberley is alicensed Casualty and Fire Independent Claims Adjuster, founding board member of the National Asso-ciation of Subrogation Professionals (NASP) and Founding Editor of Subrogator magazine. She can bereached at Kimberley.Gunther@cognizant.com.Rob Fishman is CEO, Evogi Group, a provider of insurance software, where he is responsible for businessstrategy and the attainment of corporate objectives. Previously, Rob was a senior executive and boardmember, with P&L and functional experience at publically traded and private property and casualtyorganizations. He has demonstrated leadership in startups, turnarounds and acquisitions, coupled witha deep understanding of strategic development, execution and change management. Rob’s 30-plusyears of insurance industry experience include positions as Chief Underwriting Officer for Zurich NorthAmerica. He began his insurance career at Progressive and holds a B.A. in economics with honorsfrom Hofstra University and a J.D. from the University of Toledo, College of Law. Rob also received hisC.P.C.U certification in 12 months and was a member of the Pennsylvania Bar. He can be reached atRob.Fishman@evogi.com.About CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered inTeaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industryand business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50delivery centers worldwide and approximately 130,000 employees as of September 30, 2011, Cognizant is a member ofthe NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performingand fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant. World Headquarters European Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. 1 Kingdom Street #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA Paddington Central Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 London W2 6BD Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +44 (0) 20 7297 7600 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +44 (0) 20 7121 0102 Fax: +91 (0) 44 4209 6060 Email: inquiry@cognizant.com Email: infouk@cognizant.com Email: inquiryindia@cognizant.com© Copyright 2012, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein issubject to change without notice. All other trademarks mentioned herein are the property of their respective owners.