Telematics auto insurance is not yet widely known, yet many industry experts believe that within the next ten years it will have changed the face of the auto insurance landscape forever.

How does it work

What is telematic insurance? It’s essentially a type of mini computer in your car that tells the insurer about your movements. It’s a small device, about the size of a cigarette pack and often a plain little black box; hence the common name for such policies is black box insurance. If you’re familiar with sat navs, it’s essentially the same thing but without the screen. Like a sat nav, it sends a signal to a satellite, but instead of retrieving it to plot your position on a map, it simply stores the information in the insurance company’s central database.

Like satellite navigation technology, it can plot your position, at any time, with an astonishing accuracy of about five square meters. Since the signals are transmitted continuously, the computer can track not only your position but also your speed. This means that it can also calculate your position on the road, acceleration and braking and plot that on a road map, comparing it to the current speed restrictions.

The advantages of telematic insurance for motorists

One of the problems with car insurance is that drivers tend to group together and label themselves. This is fine if you’re a ‘positive’ tag, like middle-aged and experienced, but annoying and, more to the point, expensive if you’re a ‘good’ driver but included in a group that has a bad reputation. For example, young drivers (18-21); nightclub bouncers and comedians (who often drive late at night) or previously convicted drivers.

By choosing to have a telematics insurance policy, you are immediately suggesting that you are a responsible driver because you are happy to have your driving habits monitored. This is why black box insurance quotes tend to attract a discount against comparable policies. Direct Line recently stated that discounts of up to 40% can be obtained.

The sources vary in how they work, but they all work on a similar principle in that they reward responsible driving habits. If you know you’re a sensible or experienced driver, why should you care if a computer is tracking your movements? Similarly, if you are a law-abiding citizen, do you really care if the computer tracks you to the staff or station car park, or to the local supermarket? It might be different if you’re a drug dealer or a sleazy politician, but most people aren’t.

One thing that also happens is that drivers make sure they drive more correctly because they know someone is watching them. It’s a bit like drivers slowing down when they see speed cameras. If the driver is aware that his actions are being monitored, he tends to act with a bit more judgment, which is a win-win.

An unrelated benefit is that the black box acts as a tracking device and can provide the insurance company and/or police with the exact location of your vehicle in the event of theft.

The disadvantages of black box insurance

The main objection to such sources is that it is about Big Brother personified. This means that ‘The Man’ can see where you are (well, at least where your car is) at any time. His privacy is invaded. Consumer action groups are rightly protesting privacy concerns, particularly who can access such personal data, but they can’t stem the proverbial storm ahead.

The other big problem is that if you fail to comply with the different driving parameters imposed by the insurer, you will be penalized. This can be as simple as breaking a mileage limit, or it could be because the computer has calculated that you are speeding regularly. It is also fair to say that the various telematics insurance providers have a different methodology for fines or penalties which can be very confusing when it comes to comparing policies.

Why do motor insurers love this technology?

The dilemma for insurers is that the insurance is based on the outdated concept of uberrima fides, or maximum good faith. The problem is that many insureds are really “cheap with the truth” when it comes to seeking quotes. While this is clearly a breach of contract, not only will such an omission or error need to be detected, but it will often result in lively disagreement with the policyholder should compensation money be refused or reduced to the light of the fact

For auto underwriters, the biggest financial loss actually comes from the many policies issued that contain misrepresentations that lowered drivers’ premiums but go unnoticed because there are no claims. These shortfalls often go unnoticed and add up to millions of pounds in lost revenue.

While the motorist may regard them as “little white lies” that are justified by reducing unnecessarily expensive premiums. Subscribers and usually courts will also see them as misrepresentation and breach of contract. Is this a significant factor? A recent survey of nearly 1,000 people conducted by Consumer Intelligence on behalf of Lexis Nexis found that about a quarter of them thought omitting or adjusting facts was acceptable behavior when requesting a car quote.

For the insurer, the little black box means that they can get a very good understanding of the motorist’s driving habits. You may not be able to tell them if the policyholder is ‘facing’ the policy of your teenager, who is named as an additional driver, but you can show that the car is being driven into a college parking lot five days a week , miles away from the office block where the policy holder works.

You can also tell where the car is parked. The statement may indicate that it’s safely stored in a garage overnight, but increasingly sophisticated and accurate satellites can trace the car as if it were parked on the street. Similarly, the applicant can claim that he only drives 2,000 miles per year, but will quickly stand out if he reaches that figure within the first three months.

The policyholder might suggest that the car was stolen and set on fire the night after a hit-and-run accident, but the car’s movements might suggest otherwise.

The telematics insurance provider may impose limited motorway driving, a curfew for driving after midnight, or parking in a particularly dangerous part of town. Now there is the proof when transgressions happen.

When a driver has a good record, the insurer may reward him with reduced premiums because he is exactly the type of insured you want. Conversely, ‘bad’ drivers can see their premiums increased and even see their policies cancelled. This transparency is a boon to insurers.

The future of auto insurance

Many people in the insurance industry recognize that telematics policies will become the norm in the future, where you will still be able to buy a ‘traditional’ policy without the black box but will have to pay more for the privilege. You will opt out in the new standard way of doing things, rather than opting in as is the current situation.

This is a bold statement as only around 1% of UK policies today are telematics policies and only 3% in Italy are ahead of European countries in this regard; but that’s because it’s new technology. This technology has been around for over ten years and has been well tested and proven. The cost of the small back boxes has come down and may even be replaced by newer equipment or ‘applications’. Not only that, but the improved results are there to see for all insurers.

In fact, 2014 has been a turning point with many more auto insurers offering telematics insurance policies. No doubt there will soon be a greater emphasis on such policies within vendor marketing and advertising.

Some commentators even see a future where certain insurers refuse to deal with someone without a telematics device, a bit like insurers currently refusing to quote drivers with a DUI record.

Telematics insurance may only be a nascent concept at the moment, but it looks set to grow enormously in the next decade and could well become standard operating procedure for British motor insurance.