Fitch: Direct Line Shows Potential of Telematics for Insurers

Tue May 6, 2014 9:43am EDT

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(The following statement was released by the rating agency) LONDON, May 06 (Fitch) UK insurance group Direct Line's focus on growing its telematics business, which uses technology to track driver behaviour, highlights the potential benefits for the sector from the increased use of technology and big data, Fitch Ratings says. Early movers in the telematics segment could gain from better retention of lower-risk drivers, while the technology could also reduce fraudulent claims. Telematics enable insurers to monitor numerous data points, including the number of journeys a driver makes and the time of day they are driving, as well as specific driving behaviour such as rates of acceleration and braking. The data, if it can be successfully interpreted, should be a more accurate indicator of risk than the traditional proxies such as age, address, vehicle type and occupation. This should enable insurers to improve their pricing models and could in turn improve profitability. For Direct Line, which has recently launched a new "self-install" system, telematics could help the company win business among young drivers. Better customer segmentation means insurers that make the best use of telematics will find it easier to identify low-risk drivers and retain them as customers by offering discounts. For the industry as a whole the data should reduce fraud. For example g-forces recorded by the devices could help to determine whether a whiplash claim is genuine and whether a claimed injury is consistent with the speed at the time of the accident. We believe undetected motor fraud is likely to be in excess of GBP1.2bn a year and a 50% drop would improve the combined ratio of the motor insurance industry by seven percentage points. As the use of new technologies becomes mainstream in the industry, there will be winners and losers. Firms with more agile operating structures and efficient decision-making processes will be better positioned to benefit. In the long-run, we believe those with the most to gain would be insurers that are quickly able to alter and adapt prices. Gibraltar based insurers such as Hastings have demonstrated such flexibility, allowing them to gain significant market share in the past few years. While telematics are a potentially significant tool in improving profitability, there are several difficulties to resolve. These include successfully mapping the data onto risk models, the initial investment in hardware and infrastructure and potential pitfalls around data protection. Given the highly competitive nature of the UK motor insurance sector, there is also the risk that any improvement in profitability could be lost through a broad reduction in premiums. An example of this in the last few years was where insurers cut premiums on the expectation that new regulations would cut the number of lower-cost bodily injury claims. Fitch recently published a special report on the use of telematics and big data "UK Personal Motor Insurance: Innovation and Opportunities in a Challenging Market" available from www.fitchratings.com. Contact: Anna Bender Associate Director Insurance +44 20 3530 1671 Fitch Ratings Limited 30 North Colonnade London E14 5GN Martyn Street Senior Director Insurance +44 20 3530 1211 Simon Kennedy Director Fitch Wire +44 20 3530 1387 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: UK Personal Motor Insurance here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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