Application of Telematics System in Motor Insurance - Essay Example

Application of Telematics System in Motor Insurance Introduction: Telematics insurance system is an innovative concept that encompasses a wide rangeof applications “beyond the traditional insurance coverage” (Tindall, 2013). The system, which commands high popularity in developed countries such as the UK and US, has initially been based on a “pay-per-km (Pay-As-You-Drive or PAYD)” but has evolved in recent days to comprise the concept of “Pay-How-You-Drive (PHYD),” signifying that the insurance premium is calculated on the basis of “how” one drives the vehicle rather than “how far” one drives it (Tindall, 2013). The insurance schemes using telematics technology has several advantages while at the same time it ails from certain disadvantages. Part-A: Advantages of Telematics Insurance: One of the main advantages of telematics insurance is that it can constantly remind the driver of how fast he or she is driving the vehicle. Thus, when a person drives the vehicle beyond the safe speed limit, it works as an automatic check on dangerous habits. Thus, the younger generations who tend to embark on dangerous driving habits will b encouraged to adopt safe driving practices through this system of insurance. Since the insurance company collects the premium based on the driving behaviour of student drivers, telematics will inculcate in them the habit of safe driving. It also offers a no claim-discount for the first five years and, therefore, it can reduce the risk of accidents in the case of young student drivers, who otherwise tend to drive recklessly. This in turn will also help the students to get a low insurance premium, which can be an attractive proposition for them. On the expiry of the insurance coverage reimbursement is made for the unused miles, and this enables the students to save the amount from their first premium deposit. Telematics technology helps the insurer also to advise young student drivers when they meet with any road accident. Since the technology tracks driving behaviour, it allows them to claim damage from the insurer, provided there is no fault in their part. Some insurers such as “Insure the Box” provide a “bonus of 100 mile per month” to young student drivers if they drive safely (Avery, 2011). “As per ABI news release on 5th march 2013” a reduction in car insurance premium for young drivers of up to 20% is expected, if the government takes action for maintaining a complete risk free driving on roads by the young students (ABI News Release, 2013). The European Court of Justice (ECJ) has announced recently that it will prohibit insurance companies which tax more premiums on the basis of sex discrimination from young student drivers. This becomes a great boon to the young student drivers as there will be no chances of foul play or discrimination based on sex. Disadvantages of Telematics Insurance: Telematics based insurance policy has not been made mandatory for young drivers, and those who do not want it can opt out from using the same in their cars. This can facilitate insurance companies the opportunities to collect higher premium from student drivers. Besides, it precludes non-opted persons from the coverage that encourages safe driving practices, thus making them prone to accidents. The insurance company scrutinizes the driving behaviour for 45 days and sends warning to those who engage in casual or dangerous driving. When such behaviour continues, the insurer recalculates the premium based on “pay as you drive” policy. Thus, a segment of the students who engage in rash driving will have to pay higher premiums. When student drivers were caught by the law enforcement for unsafe driving, the law revokes their insurance policy with a prior notice of 9 days. Most of the insurers fix premiums on the basis of feedback and young drivers use peripheral sources such as pricing algorithms available in the market. Sometimes, the insurers use the feedback of the pilots appointed by them for evaluating the attitude of young student drivers. This varies in calculation and ratings done by the insurers and sometimes this causes higher payment liability in terms of premium than the actual amount. Another drawback of telematics is that the data can be misused or manipulated by “regulatory or public personnel” in their favour (Laurie, 2011). “According to ABI news released on 5th march 2013, the government will bring some new conditions and or amend some existing conditions in order to ensure secure driving by young student drivers” (ABI News Release, 2013). These include the following: 1. The minimum learners’ time for young drivers has been increased to one year 2. Reduction in count of co-young passengers along with young drivers 3. Young student drivers are not allowed to drive during nights in beginning days after passing the driving test 4. The alcohol driving limit has been fixed at zero for the initial days after obtaining license. Part-B: Recommendation for the Female Friend who Uses the New Ford Focus: The female friend, being a university student who uses a new car, will be benefitted most through any of the insurance policies under telematics system that offers coverage based on safe driving at a lower premium. Currently, her vehicle is covered through the insurance contract of her parents for which they may be paying a higher premium. If she opts for any telematics insurance, the premium on the coverage can be reduced to a great extent. The main reason I suggest this option is that my friend is a person who is very sober in her driving behaviour. She always remains calm and cautious on the road and never engages in rash or negligent driving. She has never received a ticket for any violation of traffic norms for the past two years since she acquired her license. Thus, if she opts for any telematics insurance scheme, she will be able to drastically reduce the payment towards the premium currently being charged under her parents’ insurance contract. Under normal insurance schemes, new cars cost heavily in terms of the premium on them, especially when it is paid through the insurance contract of adults. On the other hand, if the same car is insured under the telematics scheme, the premium can be reduced to a great extent as it is based on “how” she drives the vehicle. There can be an apprehension that the telematics technology is expensive. However, when one considers the fact that my friend’s car is of an engine size of more than 1200 cc, it transpires that the insurance premium will fall on the higher side. Thus, the benefits in terms of reduced premiums for a longer term for accident free driving will save her considerable revenues that can offset any additional cost on telematics technology. However, she may compare the rates in offer by various insurers and choose one that matches best to her requirements so that she can tap the best benefits under available schemes. Recommendations for the Male Friend who Uses a 15-Year-Old Ford Mondeo: The male friend, who uses a 15-year-old car, has to pay only a small premium toward the insurance contract, which is currently being covered through his parents. Therefore, the financial burden for the insurance premium is rather insignificant and making expenditure on telematics technology may appear to be a redundant exercise in his case. However, I still feel that it is better for my friend to have telematics insurance mainly because of the reason that he often tends to drive in a very rash and negligent manner, in utter disregard to the traffic regulations and rules. His driving history is rather a saga of constant tickets than stable and safe behaviour. Therefore, monetary aspects aside, his case needs consideration in terms of his personal safety and security. If he gets a coverage under any of the telematics insurance schemes, he will be forced to exercise more caution and control over his driving habits, which will ensure that he does not commit any intentional errors. The best advantage of telematics insurance is that it constantly monitors and warns the drivers when they indulge in dangerous driving habits. Thus, if my male friend subscribes to such an insurance system, the element of apprehension that he is being watched will always remain in the back of his mind and he will desist from engaging in dangerous driving habits. This will automatically ensure that he drives with more responsibility which will serve not only his interest but also the others on the road. In addition, when a sense of responsibility is instilled in him, he will maintain consistent safe driving practices which will ultimately pay off in terms of reduced premiums on the insurance. Therefore, considering the personal safety and long term benefits that may accrue to my friend, I will suggest he obtains insurance coverage under any of the telematics insurance schemes rather than continuing the contract under his parents’ name. Conclusion: Several insurance schemes such as Ingene, which is a new black box insurance policy with telematics, are available for student drivers. Such schemes will help them obtain the insurance coverage under affordable premiums on the basis of evaluation of their driving behaviour. This will help in inculcating in them a sense of responsibility and ensure that they maintain safe driving practices. The main consideration, however, is that decisions need to be taken on the basis of individual traits and one needs to subscribe to an appropriate insurance scheme after properly evaluating all the available options. Reference List Avery, L. 2011. How a “Black Box’ Mean Cheaper Car Insurance for a Young Driver. Confused.com. Available at [Accessed on 19 February 2013]. ABI News Release. 2013. Association of British Insurers. Available at [Accessed on 19 February 2013]. Laurie, A. 2011. Telematics: The New Auto Insurance. Available at [Accessed on 19 February 201 3]. Tindall, J. 2013. Insurance Telematics. Finity.com. Available at Read More