Navigating New Roads: The Impact of IoT and Telematics in Auto Insurance

As we approach the second half of this decade, the auto insurance sector is undergoing a significant technological transformation, driven by the Internet of Things (IoT) and telematics. Statista projects that the number of IoT devices worldwide will reach 18 billion in 2024 and nearly double by 2030, growing from 15.9 billion in 2023 to over 32.1 billion.¹

For insurers, telematic technologies – including in-car sensors, smartphone apps, plug-in devices, and other connected components – now collect and transmit data on metrics such as speed, braking patterns, mileage, and environmental factors like road conditions. The real-time data amassed from these connected vehicles, provides valuable insights into driving behavior, vehicle condition, and overall risk. This data then allows underwriters to more accurately assess individual risk profiles, moving away from the traditional one-size-fits-all insurance model.

Soon, vehicles without telematics will be rare. According to the McKinsey Center for Future Mobility, connected cars are expected to account for 90% of all new U.S. vehicle sales by 2025.² This rise in connected vehicles is fueling the adoption of telematics in auto insurance, allowing carriers to offer more tailored and responsive coverage based on real-time data.

With usage-based insurance (UBI) at the forefront of this shift, IoT and telematics are revolutionizing risk assessment and pricing, while also reshaping customer engagement.

Driving Change: Proactive Risk Management and the Increased Demand of UBI

IoT is enabling insurers to shift from reactive to proactive risk management. Real-time data from connected vehicles allows carriers to anticipate potential issues before they occur. Progressive exemplifies this approach, leveraging telematics to achieve a 20-point advantage in loss ratios compared to the market average over the past two years — demonstrating the effectiveness of advanced telematics pricing.³

Telematics technology is also central to the development of UBI models, where premiums are customized based on actual driving behavior. According to the J.D. Power 2023 U.S. Auto Insurance Study, rising auto insurance rates have driven increased UBI adoption, with customers demanding tailored insurance products and seeking lower-priced policies.⁴ As connected car technology becomes more widespread, facilitating easier collection of vehicle and driver data, UBI market expansion is expected to accelerate. The global UBI market is projected to grow from USD 30.6 billion in 2023 to USD 80.7 billion by 2028, with a compound annual growth rate (CAGR) of 21.4% during the forecast period.⁵

Overcoming Challenges: Privacy, Consent, and Data Usage

Despite the technology’s benefits, integrating IoT and telematics in auto insurance faces roadblocks. Privacy concerns and consent for data usage are significant issues. A recent lawsuit against General Motors and LexisNexis⁶ brought to light the complexities surrounding data ownership and consent, underscoring the need for transparency in how data is collected and used.

Moreover, the perception of telematics as "spying" can discourage adoption. Matteo Carbone, Director of the IoT Insurance Observatory, argues that the real issue is not the data collection itself but ensuring an attractive value proposition for consumers. When drivers see tangible benefits, such as discounts or improved safety features, their concerns diminish.⁷

In an article for Insurance Thought Leadership (ITL)⁸, Carbone and Henry Kowal, Director at Arity, an Allstate Insurance subsidiary, outlined four obstacles to unlocking the full potential of telematics:

1. Lack of Agent UBI Promotion: Agents, who earn commissions on premiums, are reluctant to promote UBI as it could reduce premiums — and their income — by 30% or more.
2. Delayed Risk-Rate Alignment: An accurate alignment between insurance risk and premium rates typically occurs only at policy renewal, following a monitoring period.
3. Limited Use of Telematics Data: Telematics data is primarily used to assess risks, rather than to actively mitigate them.
4. New Business Limitation: Telematics is primarily offered to new customers, rather than existing policyholders, limiting its potential to affect a carrier’s entire risk pool.

For telematics to achieve its full potential, these barriers must be overcome. Insurers need to engage agents more effectively, offering incentives that align with their business models. Educating agents and policyholders about the benefits of telematics is crucial for wider adoption.

Additionally, expanding telematics beyond new policyholders to existing customers can maximize impact. As Kowal points out, the Arity IQ platform enables insurers to access extensive driving history data, allowing for precise pricing and risk evaluation at the time of quote.

Navigating the Road Ahead: The Future of Auto Insurance

The integration of IoT, connected vehicle data, UBI, and telematics offers a roadmap to innovation and resilience as the auto insurance industry advances. By investing in these technologies, insurers can enhance risk management, improve customer experiences, and secure a competitive advantage. Embracing this digital evolution will position insurers to thrive in a rapidly changing landscape, steering the industry towards a future defined by data-driven decision-making and personalized customer interactions.

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Sources

1. Statista – https://www.statista.com/statistics/1183457/iot-connected-devices-worldwide/
2. McKinsey – https://www.mckinsey.com/industries/financial-services/our-insights/connected-revolution-the-future-of-us-auto-insurance
3. ITL – https://www.insurancethoughtleadership.com/iot/your-car-spying-you
4. J.D. Power – https://www.jdpower.com/business/press-releases/2023-us-auto-insurance-study
5. PR Newswire – https://www.prnewswire.com/news-releases/usage-based-insurance-market-worth-80-7-billion-by-2028---exclusive-report-by-marketsandmarkets-301955996.html 
6. PC360 – https://www.propertycasualty360.com/2024/05/30/a-lot-of-outrage-privacy-suits-allege-gm-steers-driver-data-to-insurers-414-254480/ 
7. ITL – https://www.insurancethoughtleadership.com/iot/your-car-spying-you
8. ITL – https://www.insurancethoughtleadership.com/auto-insurance/its-time-revitalize-auto-insurance