Technology has cut its transformative swath through the media, transportation and hospitality industries. Insurance could be next.
Telematics, the long-distance transmission of computerized information, is a small but growing element of the insurance business. If adopted on a widespread basis, it could revolutionize the underlying risk-spreading methods used for generations, analysts say.
Insurers have long used the age, sex and driving history of their customers to set premium prices. An 18-year-old male driver typically is more expensive to insure than a 45-year-old female driver, for example.
But not every teenager is a bad driver and not every middle-aged person is a good one. In order to more fairly and accurately price insurance, some companies have started to use data mining technology to chip away at old methods.
Taking Behavioral 'Snapshots'
Progressive (PGR) has been among the leaders in this area, permitting its customers to insert a "Snapshot" gadget into their cars in order to provide increasingly sophisticated information about their driving habits.
"It made more sense to price premiums on how you actually drive," said David Pratt, Progressive's general manager of user-based insurance.
The Mayfield, Ohio-based insurer began developing the gadgets in the mid-1990s. The market for them is growing quickly. The program now generates $2.5 billion in premium revenue for Progressive and serves 2.5 million customers.
Progressive customers receive the gadgets and plug them into their cars. After 30 days, they receive a discount if they drive safely. After six months, the company recalculates the discount. Customers are then asked to return the devices, in part to keep down technology expenses.
The company also has resorted to federal litigation to protect its patented telematics technology.
State Farm Insurance's "Drive Safe and Save" program measures the rates of acceleration and deceleration, braking habits, even the G-forces around curves. Participants can see their premiums drop as much as 50%.
"There is an advantage to the customer in that the customer wants more control over the premiums they pay," said Dick Luedke, a spokesman for State Farm. "It might cause you to go a little more slowly and a little more carefully than you otherwise would.
Allstate (ALL), which settled a patent lawsuit with Progressive in 2011, has its own "Drivewise" system.
Timetric, a London-based market research company, estimated in an October 2014 study that 4.5 million telematics-supported insurance products with premiums totaling $4 billion had been written globally by December 2013, with Italy, the U.K. and U.S. being the most mature markets. In Italy, where telematics-supported insurance is oldest, market penetration is only 4% of insured drivers.
Altering The Actuarials
Such disruptive technology could alter the basic assumption of insurance — that it's better to pool risks because it's impossible to predict misfortunes precisely.
"Companies would stop punishing safe drivers for the mistakes of the risky drivers," said Michal Kosinski, a professor at Stanford University.
"In a way, it completely changes the function that insurance has at the moment," Kosinski said. "For the companies, it makes sense. They can give you a discount because they know you better.
Said Luedke: "At this point, you can only win: It's only discounts. Now, the level of discounts vary.
If the practice becomes more popular, one presumes premiums for risky behavior will rise as premiums fall for safer people.
Although primarily used in the auto insurance field, one New York-based insurer, Oscar, gives customers a "Misfit" fitness tracker to wear, helping to shave $1 off a premium for each fitness goal reached.
While wireless mobile telematics technology is fresh, the practice of electronic monitoring is not new to property insurers who've long discounted premiums for clients who install smoke detectors and burglar alarms.
Cautiously Invading Privacy
So far, automotive telematics are voluntary but raise questions of privacy. Progressive doesn't monitor customers' whereabouts. Location trackers, such as the OnStar system devised by General Motors (GM), several years ago led to complaints and calls from Democratic lawmakers on Capitol Hill for new regulation and legislation.
Certain states, such as California, only permit insurance companies to track their customers' accrued mileage. But Timetric, the London researcher, believes governments will drive the growth of automotive telematics through 2018 because of enhanced safety and accountability.
Even the existing voluntary programs — including a recent Progressive-GM partnership giving participating drivers a detailed driving assessment — seem to empower the insured and insurers.
"If we can identify those really safe drivers and give them a good deal," Pratt said, "they're more likely to remain customers."