Automakers Move Into the Insurance Business Thanks to Connectivity

Usage-based insurance is one of the most fundamental changes to the auto insurance business since it began at the turn of the twentieth century. Just as advertising has transformed through the collection of massive quantities of individual user data, the same is happening to insurance premiums. Automakers have sampled the possibilities by agreeing to supply some of that data to insurers, but they are now taking a more active role in selling policies to customers thanks to the in-vehicle connectivity they provide.

At its core, insurance is about pooling the premiums collected from policyholders and paying out claims when something goes wrong. The amount of the premiums is based on risk modeling. Its goal is to accurately predict how much will likely need to be paid out each year while making sure the premiums are at least equal to or greater than that amount.

In-Vehicle Connectivity Data Monitors Behavioral Risk

Traditionally, car insurance premium models are based on a combination of demographic information about drivers. To varying degrees, this data can be correlated with the probability of getting into accidents, geographic location, and the value of the insured vehicle. However, those model parameters are all fairly coarse—not every 24-year-old single male or 50-something mother will have the same risk profile.

This is where in-vehicle connectivity comes in. For the better part of a decade, insurers like Progressive have offered policyholders the option to install a device in the vehicle’s diagnostic port. The device tracks some of their driving behavior such as speed and acceleration/deceleration rates that are indicators of risk. In exchange, the policyholders receive premium discounts.

More recently, automakers such as Hyundai Motor Company have struck deals with data aggregators like Verisk Analytics to provide telemetry data directly captured through embedded telematics systems. Guidehouse Insights’ Market Data: Connected Vehicles report anticipates that nearly 94% of new vehicles in North America, and 80% globally, will come equipped with embedded telematics by 2025. General Motors (GM) is taking this a big step further by launching its own OnStar Insurance product, which directly leverages vehicle data it has access to.

“What does tire pressure have to do with your auto insurance?” asks Andrew Rose, president of OnStar Insurance Services. “If your tires are under inflated, your stopping distance is longer. We're not pricing on this now but this is an example of things that you can incorporate into a pricing methodology that come off of a vehicle that can't be found, except from an OEM where we can use that information to give you better pricing.”

Tires that are consistently underinflated could be an indicator of a driver not taking care of or maintaining the vehicle, thus posing a higher risk of crashing. Risk modeling isn’t the only advantage of connectivity. It can also improve customer service. OnStar gets 6,000 automatic crash responses per month from GM vehicles. When a driver with OnStar Insurance gets into a crash, the system will notify emergency responders and automatically open a claim file and start pre-ordering likely repair parts based on the data from the collision.

Big Data Brings Big Opportunity

Whether automakers offer their own branded insurance services, or insurance services form other partnerships, the data from vehicles will lead to more fine-grained pricing models. These models will benefit lower risk drivers and cost others more. The big unknown is how big discounts will be and how concerned drivers and regulators will be about privacy. Data privacy laws in Europe and elsewhere could mitigate some of the advantages from using in-vehicle connectivity. Regardless of the premiums paid, it can also improve the service experience and enable significant new revenue opportunities for whoever controls the data coming from vehicles.