• Cognizant 20-20 Insights
`
`The Telematics Advantage: Growth,
`Retention and Transformational
`Improvement with Usage-Based Insurance
`
`Executive Summary
`We are now in the early stages of the next
`disruptive shift in work and technology, with a
`powerful economic catalyst sweeping across
`industry. As a result of new, cloud-powered
`technologies, change is coming at an ever-
`accelerating pace, particularly as the millennial
`generation comes of age and sees few barriers to
`the way technology can empower individuals and
`businesses.
`
`The rise of millennials, along with the globaliza-
`tion of markets, the virtualization of business
`processes and emerging social and mobile tech-
`nologies are redefining how work will be done
`today and tomorrow. As companies seek to match
`the Sunday night experience of mobility, col-
`laboration and social networking with Monday
`morning, these striking changes require orga-
`nizations to rethink and rewire every aspect of
`their operations.1 While some companies are still
`on the sidelines, others are examining every facet
`of their business model and are adapting “new
`ways” of working that are more automated, col-
`laborative and virtual.
`
`Within the insurance industry, change has come
`slowly and predictably over time — until now. One
`new technology that has the potential to bring
`significant change to all aspects of the insurance
`business is telematics, with its ability to monitor
`vehicle driving behavior and communicate back
`to the insurer with extremely rich and detailed
`
`cognizant 20-20 insights | january 2012
`
`data. Early adopters are already reaping signifi-
`cant benefits from this wave of change.
`
`Telematics is defined as machine-to-machine com-
`munication, whereby a device plugged into the
`on-board diagnostics (OBD) port of a vehicle, or
`originally installed by the manufacturer, collects
`particular data and sends it via wireless com-
`munication to the insurance carrier to derive
`meaningful and predictive insights about how indi-
`viduals drive.
`
`For some carriers, telematics data provides the
`basis for understanding how far, how fast and
`under what conditions a person drives, as well
`as a foundation for more sophisticated data
`modeling and scorecard development. This ability
`is fostering new and innovative products that
`more accurately price risk and attract profitable
`new customers, making the traditional segmenta-
`tion of pricing auto insurance — based on average
`characteristics or certain populations’ gender or
`age — completely obsolete.
`
`In addition to pricing, telematics and usage-based
`insurance (UBI) approaches are
`introducing
`opportunities for carriers to build and maintain
`richer relationships with customers than ever
`before, while also laying the foundation for better
`decisions and core business process optimization.
`This white paper lays out how telematics and UBI
`are revolutionizing rating variables and discusses
`the potential they have for significantly changing
`or eliminating claims processes and workflow.
`
`

`
`It also offers actionable advice on how insurers
`can begin integrating these technologies into their
`IT infrastructure by examining a new managed
`services approach that we have recently launched
`in partnership with Evogi Group, a leading provid-
`er of usage-based and behavior-based software
`solutions to the insurance industry.
`
`Telematics Pioneers
`One leading carrier, Progressive Insurance, has
`over a decade’s headstart with telematics. Its
`patented “Snapshot” program is already rolled
`out, with enrollments increasing to 50,000 new
`policyholders a month in 39 states. As such,
`Progressive has proved the
`acceptance and scalability of
`UBI in the U.S.
`
`Other carriers are following
`suit with UBI products, teen-
`driver safety programs or
`a mix of UBI and behavior-
`al-based
`insurance
`(BBI)
`programs, as well as added
`services
`to prevent
`their
`best customers from being
`poached by competitors.
`
`Telematics-based
`insurance products
`are now being
`explored by personal
`and commercial lines
`insurers to provide
`policy discounts
`and enhanced risk
`management.
`Telematics has been around for some time. In the
`early days, it was used primarily by corporations to
`govern fleets for improved safety and efficiency.
`Telematics-based insurance products are now
`being explored by personal and commercial lines
`insurers to provide policy discounts and enhanced
`risk management. This has been made possible
`by the reduction in data transmission costs and
`
`device prices, which have declined to about $100
`and continue to drop.
`
`Telematics insurance products are offered as
`opt-in programs by
`insurance companies
`in
`various forms of UBI, either as commercial-
`ized products or trial offerings (see Figure 1).
`Additional carriers are expected to begin UBI
`market tests this year through 2017, according
`to Towers Watson. In fact, Towers Watson reports
`that 18% of U.S. personal and commercial auto
`carriers use or are planning to use telematics in
`the next two years. In addition, the LexisNexis
`Risk Solutions Survey (2010) indicates that 75%
`of potential customers are interested in the cost
`savings that can be achieved via UBI.
`
`While large carriers have the capacity to fund
`and establish telematics pilot projects, many
`others are challenged to build a business case
`and are launching projects to determine the
`impact on product cost, as well as the effect on
`selection, retention and acquisition of customers.
`In addition, the U.S. telematics market is the
`largest in the world and will remain so, at least
`through 2017.
`
`Usage-based insurance has social advantages,
`as well, and is promoted as a green initiative
`since it has the potential to reduce miles driven
`and, hence, emissions. In addition, UBI has been
`shown to reduce the frequency and severity of
`accidents, according to a review of available data
`by the National Highway Transportation Safety
`Administration (www.NHTSA.gov), by reducing
`the speed of travel and the number of vehicles on
`the roadway.
`
`The U.S. Competitive Landscape
`
`Market Tests
`Employees and
`existing customers
`
`Mass Market
`Offerings
`Launched products
`
`Segmented Offerings
`Launched products
`for teens
`
`Other Offerings
`Commercial, asset
`recovery, etc.
`
`State Farm Insurance
`OnStar
`
`Safeco Insurance
`21st Century
`Insurance
`
`Geico
`Liberty Mutual
`Travelers
`The Hartford
`GMAC Insurance
`
`GMAC Insurance
`OnStar
`
`American Family
`Insurance
`
`Zurich
`
`Progressive
`
`Farmers Insurance
`AAA
`MetLife
`Unigard
`State Farm Insurance
`Plymouth Rock
`Allstate
`Erie Insurance
`Travelers
`Nationwide
`The Hartford
`
`< 3
`
`3-6
`
`> 6
`
`Years of Experience
`
`Source: Evogi
`Figure 1
`
`cognizant 20-20 insights
`
`2
`
`

`
`Creating a New Telematics Product
`Building a new
`telematics-based
`insurance
`product can be complex. It begins with the desired
`strategy of the insurer and impacts the selection
`of the telematics device(s), the desired analytics
`and the required integration with the insurer’s
`operating systems. It also necessitates a close
`assessment of the potential impact the technolo-
`gy may have on underwriting and actuarial rules,
`billing, marketing and distribution, as well as the
`claims process. Other considerations include:
`• How will the
`insurer collect, aggregate,
`normalize and use the data for risk selection
`and pricing?
`• What information, and in what format, will be
`provided to policyholders to easily monitor
`their driving behavior?
`• What requirements will be necessary to
`integrate
`telematics
`into
`the
`insurer’s
`operations and core systems?
`• How will insurers support fulfillment and UBI
`customer care?
`• What are the economic considerations, and
`how will the insurer account for ROI?
`• What device(s) are compatible with my policy-
`holders’ vehicles?
`• How can insurers create a pilot program?
`Telematics Benefits, Potential ROI
`Since most carriers are still in market tests
`and seeking to operationalize UBI and/or BBI
`programs, it will potentially take them at least 12
`to 18 months to move into full production from
`the start of a pilot. This foundational focus will
`continue throughout this year, into next year
`and beyond. Companies that are first adopters
`will move on from operationalizing a telematics
`program, to exploring further applications for
`telematics data.
`
`This next wave will produce even more significant
`change in the insurance industry, as predictive
`analytics can be deployed to enhance decision-
`making, reduce costs and eliminate manual
`processes in the claims arena, while bringing
`transformation and innovation to the insurance
`enterprise.
`
`As the use of predictive modeling in underwriting
`has accelerated, these models will be increasingly
`applied to improve claims accuracy. As a result,
`and in addition to streamlined processes, the
`use of mobility solutions will increase across the
`enterprise to accommodate a new demographic
`
`of policyholders who prefer to use a handheld
`device for anytime, anywhere communication.
`
`While the complexity of establishing UBI as a
`rating tool may appear significant, the benefits
`are extensive, as emerging technologies collect
`an expansive amount of data beyond mileage.
`This information can be used to create value-
`added services, while increasing pricing accuracy,
`reducing claims leakage, reducing loss costs and,
`therefore, lowering expenses. Areas of greatest
`impact and potential redesign include:
`• Fraud reduction.
`• Stolen vehicle recovery.
`• Pricing accuracy/adequacy.
`• Lower acquisition costs.
`• Improved renewal retention.
`• Improved liability determination.
`• Improved accident investigation facts.
`• Kinematics reconstruction.
`• Reduction or elimination of towing charges.
`• Automated repair processing.
`• Automated first notice of loss (FNOL) and
`triage of claims.
`• Automated reserving.
`• Automated bodily injury estimation.
`• Automated physical damage estimation.
`• Automated claims management.
`• Automated subrogation recovery.
`Claims Impact of Telematics
`As insurers continually examine their claims effi-
`ciencies, including technologies, branding and
`customer care, while striving to leverage analytics
`for improved decision-making, telematics has the
`potential to bring the most significant transfor-
`mation to date to insurance operations.
`
`With the communication of behavioral and
`geospatial data from the vehicle at the time of an
`accident, telematics can enable real-time FNOL
`and first report of injury (FROI) reporting. By
`creating deeper predictive analytics and triggers
`for crash data and bodily injury assessments
`from similar incidents, insurers can potentially
`streamline the front-end of claims reporting. By
`doing so, they can reduce their loss expenses,
`while employing better triage of claims, potential-
`ly realizing a reduction of 20% to 50% or more in
`claims expense over time.
`
`fraud
`improve
`Telematics data can also
`monitoring by augmenting fraud data models
`with crash monitoring data to recreate scenarios
`
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`and detection of false claims. Applied to claims
`processes, analytics can help reduce fraud by
`spotting the elements of a claim that indicate
`a higher propensity for fraud. In the U.S., for
`example, the National Insurance Crime Bureau
`suggests that 10% of all property and casualty
`claims are fraudulent, yet only 20% are detected.
`
`Telematics will,
`in time, introduce
`more accuracy and
`change workflow
`entirely, delivering
`significant ROI
`over time.
`
`Understanding crash data with
`more accurate assessments will
`provide better triage of claims as
`a result of more detailed accident
`information
`received by
`the
`carrier, thus
`improving
`insights
`into which claims incur increased
`loss adjustment expense (LAE).
`Having crash data will also improve
`estimate reserves by receiving
`detailed accident characteristics and thus stream-
`lining the efficiency of the investigation and adju-
`dication process, further reducing LAE.
`
`For example, by obtaining UBI, BBI and geospatial
`data elements, a vehicle can call in the FNOL
`and potentially trigger automated subrogation
`recovery or engagement of the tow and repair
`shop, thus reducing downtime, tow charges,
`impound fees and rental car costs. Moreover, total
`claims costs will be further reduced by utilizing an
`automated estimation of the costs of repair and
`streamlining the repairs by analyzing data of the
`needed auto parts and enhancing fulfillment of
`those parts.
`
`As the delay in receiving notice of loss leads to
`higher costs, the delay in adjudication and using
`subjective elements further contribute to leakage.
`Telematics will, in time, introduce more accuracy
`and change workflow entirely, delivering signifi-
`cant ROI over time.
`
`As on-board telematics devices can produce
`enormous amounts of valuable data, its persistent
`connectivity in the event of a claim can yield
`tremendous benefits in quickly and efficiently
`assisting with managing the claims process.
`These new developments are especially timely,
`as the ranks of experienced adjusters are retiring.
`
`Added-Value Services
`With a UBI program, the carrier obtains the data
`and the opportunity to improve the risk character-
`istics of its book of business, while the policyhold-
`er receives a premium discount or the promise
`of a premium reduction. However, telematics can
`also enhance revenues for insurers and increase
`the stickiness to the insured by easily attaching
`
`value-added services. These include emergency
`roadside assistance, stolen vehicle
`locator,
`vehicle diagnostics, speed alerts, real-time driver
`feedback and driver training programs, teen
`driving alerts, safety monitoring for cell phone
`use and texting and geo-fencing.
`
`In short, a case can be made that an insurer will
`get a favorable ROI from a telematics device with
`proper installation, selection and use of data
`and the addition of value-added products in its
`strategy.
`
`‘UBI in a Box’
`
`To achieve these benefits, most insurers will find
`it necessary to enlist the services of a partner
`with experience in developing and deploying
`end-to-end UBI products. An experienced partner
`providing strategy consulting and end-to-end
`solutions — including device selection, pilots,
`field tests, fulfillment, support, actuarial services,
`integration, predictive analytics, claims solutions
`and insurance domain expertise — is more likely
`to understand the technological and business
`process nuances of telematics, to mitigate the
`risks and accelerate time to value.
`
`One way to approach this is with an end-to-end
`solution that is delivered as a managed service
`and spans strategy consulting, evaluation, field
`pilots, integration of data into core systems, fulfill-
`ment and help desk/customer care and advanced
`predictive analytics. With Evogi Group, we have
`created a “UBI in a Box” service. Evogi provides
`the integrated data hub to collect, normalize and
`apply analytics to UBI data for better decision-
`making, while we provide a private cloud service
`to deliver (at scale) technology, as well as domain
`and business process expertise to carriers.
`
`Working with us, carriers can better manage the
`complexity and moving parts of a UBI initiative
`(while applying a unique strategy for competi-
`tive advantage). By taking a managed services
`approach, they can limit the number of vendors
`and costs associated. Our solution enables
`carriers to begin with an evaluation and pilot
`before going live with a UBI service. A limited
`number of devices can be deployed as an internal
`pilot for the carrier to familiarize itself with the
`program, while further developing its strategy
`and roadmap before offering UBI to policyholders.
`
`Innovation and business strategy units are well-
`served by assessing telematics in a pilot environ-
`ment, while creating a blueprint for a successful
`UBI roadmap. This will allow them to further the
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`alignment of all program partners and define
`the roles and responsibilities of stakeholders. In
`addition, this approach allows for testing price
`and segmentation capabilities and value-added
`services, reviewing the functionality of the output
`and integration steps, while providing additional
`organizational orientation and agent training.
`A pilot environment enables carriers to build a
`brand around the use of telematics in advance of
`the launch of a UBI program.
`
`Improved Economics in
`Commercial Fleets
`Calculating ROI in a commercial program may be
`easier to establish than in personal lines; however,
`the long-term results for early adopters of a UBI
`or commercial program will change over time.
`
`For example, a 105-vehicle fleet had determined
`that both revenue per employee and revenue
`per unit (vehicle) decreased each of the past
`four years. The ratio of hours billed to hours paid
`eroded, as well. (Because of the economy, pricing
`per hour and per move are both flat except for
`a per-mile fuel surcharge.) As a solution, the
`telematics program was initiated, resulting in the
`following improvements:
`• The hours-billed-to-hours-paid ratio improved,
`as actual travel time began to conform with
`estimated travel time.
`• Specific to office moves (primarily weekend
`and evening work), return-to-office trip time
`decreased by 50%, resulting in $13,000 of
`improved productivity in the first 90 days.
`• The company essentially eliminated side-trips
`and other non-optimal route selections.
`• By ranking the drivers by company (by number
`of speeding
`incidents, hard brakes, hard
`accelerations and excessive idling), speeding
`
`incidents decreased by 12% and idling by 35
`minutes per vehicle, per day.
`
`Similar types of benefits could be accrued by
`insurers. In addition to monitoring drivers for
`safe driving habits, agents could more effec-
`tively manage risk and offer policy discounts to
`customers.
`
`Deployment of UBI and Competitive
`Advantage
`As carriers work through their approach to rolling
`out UBI programs in personal or commercial
`lines, they will need to consider their strategic
`objectives, desired competitive advantages
`and ways a connected vehicle will impact their
`business processes.
`
`By integrating telematics data into core systems —
`policy administration, actuarial and underwriting,
`billing and claims, as well as new action-oriented
`policyholder portals — more predictive and faster
`decisions can be made, perhaps even in real-time.
`Manual and time-intensive work can be stream-
`lined or eliminated as processes are automated
`with accurate geo-spatial and vehicle data. This
`will have a noticeable impact on loss ratios. As
`more data is collected and analyzed over time,
`more quantifiable savings will be determined
`and verified — benefits that will accelerate with
`greater UBI program adoption rates.
`
`The Future is Now
`Telematics has arrived. Its speed of deployment
`will continue to accelerate, but there are limited
`available resources to deploy to make it work
`effectively within your organization. Speed
`matters. Thus the fastest, most complete route
`to telematics adoption will produce a competitive
`advantage.
`
`Footnotes
`1 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.
`
`Resources
`http://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)-related
`effort to promote the understanding and widespread use of these devices. It is designed to be a useful
`resource for anyone seeking knowledge of the emerging highway-based EDR technologies. By sponsoring
`this effort, NHTSA encourages dialogue, research and development in emerging EDR technologies, with
`the goal of fewer crashes, injuries and deaths.
`
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`cognizant 20-20 insights
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`

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`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 Authors
`Kimberley 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 an
`emerging technology as part of Cognizant’s Future of Work initiatives. Kimberley has over 30 years
`of business experience, with specialized skills in developing solutions across the insurance lifecycle to
`improve 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 and
`strategic solutions in insurance core systems, technology and claims BPO. Before joining Cognizant, she
`served 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 has
`completed graduate studies in business administration from Regis University, Denver. Kimberley is a
`licensed 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 be
`reached at Kimberley.Gunther@cognizant.com.
`
`Rob Fishman is CEO, Evogi Group, a provider of insurance software, where he is responsible for business
`strategy and the attainment of corporate objectives. Previously, Rob was a senior executive and board
`member, with P&L and functional experience at publically traded and private property and casualty
`organizations. He has demonstrated leadership in startups, turnarounds and acquisitions, coupled with
`a deep understanding of strategic development, execution and change management. Rob’s 30-plus
`years of insurance industry experience include positions as Chief Underwriting Officer for Zurich North
`America. He began his insurance career at Progressive and holds a B.A. in economics with honors
`from Hofstra University and a J.D. from the University of Toledo, College of Law. Rob also received his
`C.P.C.U certification in 12 months and was a member of the Pennsylvania Bar. He can be reached at
`Rob.Fishman@evogi.com.
`
`About Cognizant
`
`Cognizant (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 in
`Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry
`and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50
`delivery centers worldwide and approximately 130,000 employees as of September 30, 2011, Cognizant is a member of
`the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing
`and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.
`
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