© 2014 Finity Consulting Pty Limited

Finity Personal Lines Pricing

and Portfolio Management Seminar

22 May 2014

Telematics down under

Jon Tindall

Outline

1. Background

2. Where’s the market at?

i. Overseas

ii. Australia and NZ

3. Why telematics?

4. What’s an appropriate strategy?

5. Product design & the customer proposition

6. Getting to market

7. Where are we heading?

2

Background

3

Background

In this presentation:

Telematics ‘Snapshot’ Survey

Nearly 50 respondents – April 2014

Cross-section of personal lines organisations and

positions

Australia & NZ focus

Finity’s Telematics Financial Model

12-year projection of key financial dynamics

Calibrated to Australian conditions and cost

structures 4

Telematics Snapshot

Survey

Finity Telematics

Model

Where’s the market at?

Overseas

Overseas

UK

UK Market has continued to mature

significantly in the last 12 months

The ‘Gender Directive’ has meant the UK

have lost a rating factor – however its just a

proxy for driving behaviour

Recent spate of mobile apps aimed at

experienced drivers – extending

beyond niche segments

Currently more than 50 telematics products,

penetration estimated around 2-3%

6

Overseas

EU

Italy has embraced insurance telematics more than any other

country.

~ 2 million cars (at Feb 2014) ~ 5% penetration

First systems GPS based to address high theft rates in Italy

UBI functionality added subsequently to assist in dealing with

escalating bodily-injury claim costs

New EU legislation: eCall

From October 2015 all new passenger and small commercial

vehicles to have telematics device

7

The Italian market: • Average Claim Size: €4,797 (approx.

AU$ 7,050)

• Mild injuries (1-2% disability) account for 15% of claims cost

*[Insurance Telematics Report 2014]

Overseas

US

US has been slower to develop than the UK. Why?

Premium affordability for younger drivers

Gender Directive

Progressive was the trailblazer but strategy from here is

unclear. Based on a different model – no ongoing monitoring

of behaviour

South Africa

o Hollard - “Pay-as-you-Drive”

o Outsurance - “Safe_Driver@Out

o Discovery – “Vitalitydrive”

8

Where’s the market at?

Australia & NZ

0.0% 10.0% 20.0% 30.0%

Profitability

Technological constraints

Privacy / Big-brother concerns

Market concentration / No move from the…

Lack of customer proposition

Bodily Injury not included in comprehensive…

% of repspondents

Most significant reason for relatively slow take-up in Australia?

Telematics Down-under

How is it different down here?

Bodily Injury not included

Lack of customer proposition

10

Telematics Snapshot

Survey

The ‘Big Two’

Big brother concerns

The Price Proposition Down-under

The price proposition varies depending on the segment and usage

Without bodily injury insurance cost ranges from 17% to 35% of

total vehicle costs

With bodily injury insurance costs range from 28% to 54%

11

52%

29%

47%

25%

31%

46%

28%

40%

17%25% 25%

35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

All ages - 13,500km All ages - 5,000km <25 - 13,500km <25 - 5,000km

Running Costs Standing Costs Comprehensive Motor

52%

29%

47%

25%

20%

29%

15%

22%

28%

42%38%

54%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

All ages - 13,500km All ages - 5,000km <25 - 13,500km <25 - 5,000km

Running Costs Standing Costs Comp + CTP

Source: RACQ estimated vehicle costs 2012, Market Finesse

Comp Only Comp + CTP

Where are people at Down-under?

12

Telematics Snapshot

Survey

5% • 5% of respondents have done nothing

42% • 42% are talking about it

16% • 16% are undertaking feasibility studies

20% • 20% are currently piloting (customers or employees)

18% • 18% have launched

What’s the progress of your Telematics strategy?

‘Insurance Box’ (Auth. Rep of QBE)

Launched October 2013

Receive OBDII box when

you take out the policy

Wunelli – technology partner

More expensive upfront –

not transparent about

savings

Break-costs apply

13

Monitor your driving behaviour online –

DriveScore™

‘SmartBox’ - AI Insurance

14

Niche Insurer based in Newcastle –

UW agent for Hollard

Launched November 2013

Hollard have significant

telematics experience in South

Africa

Technology Partner – Octo

Telematics

Telematics quotes are more

expensive than traditional policy

Relatively minor marketing effort

‘SmartDriver’ – TOWER NZ

15

Launched April 2014

Smartphone/App based

technology – 1st in AUS/NZ

Technology Partner:

‘DriveFactor’

Monitors:

Speed, acceleration, braking and cornering

250km to get a score - Potential discount up to 20%

No ongoing monitoring

Around 50% more downloads than expected during the

first 3 weeks

Why Telematics?

The Insurer Proposition

16

0.00 1.00 2.00 3.00 4.00

Fraud prevention

Claims handling efficiencies

Cross-selling opportunities

Improved policyholder retention

Selection effect

Improved driver behaviour

Better segmentation of risks

Overall Ranking

How would you rank the benefits to insurers?

The Insurer Proposition

The improved

segmentation of risks

is the leading benefit of

telematics products to

insurers

Claims-handling and

Fraud prevention rank

quite low – perhaps

due to the lack of

bodily injury

17

Telematics Snapshot

Survey

Improved Segmentation

What variables will

the product’s price

depend on?

Improved

segmentation can be

achieved without GPS

based location being

transmitted – alleviate

some big-brother

concerns

18

0.00 1.00 2.00 3.00 4.00 5.00

Other

Road type

Cornering

Time-of-day

Braking andaccelerating

Speed

How would you rank the following key drivers of risk?

Telematics Snapshot

Survey

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

< 5% 5% - 10% 10% - 15% 15% - 20% 20%+

% o

f re

spo

nd

en

ts

Selection effect

The Insurer Proposition - Selection

Nearly half of

respondents believe that

the selection effect is in

order of 5% - 10%

Products targeting

younger drivers in the

UK generally offer an

upfront discount

19

Telematics Snapshot

Survey

The Insurer Proposition - Behaviour

How might a telematics device improve ongoing driver behaviour?

How much discount should I give away to ‘selection’ and how

much can I make available to ongoing discounts?

Ongoing behaviour improvements required to get significant social

benefits – i.e get the support of governments and regulators.

20

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1 month (%) 3 months (%) 1 year (%) 2 years (%)

What reduction in claims costs would you expect due to driving behaviour?

Telematics Snapshot

Survey

The Insurer Proposition

Segmentation of risks – default scenario

Average Premium Discount

1

-18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Inforce Mix by UBI - Telematics Book

1 2 3 4 5 6 7 8 9 10

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Inforce Mix by UBI - Without Telematics

1 2 3 4 5 6 7 8 9 10

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1 2 3 4 5 6 7 8 9 10

Average Premium Discount by UBI

21

0%

20%

40%

60%

80%

100%

120%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

LR - w/o telematics COR - w/o telematics

LR - telematics book COR - telematics book

Finity Telematics

Model

0%

10%

20%

30%

40%

50%

60%

None 1 - 2% 2 - 4% 5 - 10% 10%+

% o

f re

spo

nd

en

ts

Retention Improvement

The Insurer Proposition - Retention

The majority believe retention benefits will be in the order of

1%-2%

Anecdotal evidence indicates this might be conservative

22

Telematics Snapshot

Survey

The Insurer Proposition – Retention

Projected retention rates under different pricing strategies

Retention improvement peaks 6 or 7 years in – declines due

to quality of risks …

23

80.0%

81.0%

82.0%

83.0%

84.0%

85.0%

86.0%

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Lift -20% Default Lift + 20% No Telematics

Finity Telematics

Model

What’s an Appropriate

Strategy?

24

Telematics Plays ….

25

Lead21%

Fast follower26%

Only if forced34%

Will not implement

19%

How would you describe your pace or positioning?

Non-existent42%

A defensive play20%

An acquisition play19%

Experimental19%

What would best describe your organisations telematics strategy?

Telematics Snapshot

Survey

What are the strategy

options?

Lead

Fast Follower

Do-nothing

What are the risks and

benefits of each strategy?

Pricing

Operational

Reputational

Telematics Plays

What if: you do-nothing, and telematics does take off?

Loss ratios worsen – especially for the younger age groups

26

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Loss Ratios

0-24 25-34 35-54 55-69 70+

Share of new business decreases

over time, along with market share.

Retention rates increase, as the

worse risks are unlikely to switch to

telematics

0.0%

5.0%

10.0%

15.0%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Market Share

0.0%

5.0%

10.0%

15.0%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Share of NB

81%

82%

83%

84%

85%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Retention

Finity Telematics

Model

Telematics Segments

Consensus is that young drivers is the main target segment,

because they are the most willing to adapt.

Older drivers will be attracted to the potential premium

discounts.

27

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

High-risk drivers - prior infringements

Metro drivers

Prestige vehicle drivers

Older drivers with low mileage

Parents of young drivers

Younger drivers (< 30)

% of repspondents

To what market segments would telematics appeal?

Telematics Snapshot

Survey

Generally segments

where insurance is

high % of running costs

Product Design

28

Product Design

There are as many product designs as there are products. Some

basic design considerations:

Benefit mechanism:

Premium discount

reward miles

petrol discount, retail discounts etc

Technology Platform

OBDII

Smartphone

‘Pre-market’ box

Target market segments?

29

Product Design

Telematics is much more than simply a pricing tool. Other

product design considerations include:

Vehicle maintenance

Theft tracking

Enhanced road side assistance

Integration with social media and other online experiences

“Gameification”

Live content, like traffic data, weather information, etc

Parental supervision

30

Product Design – Benefit Mechanism

Some basic product design decisions need to be made

What best fits your target market and strategy?

One-off assessments for an acquisition / selection

play 31

One-off assessment

18%

On-going monitoring

40%

Usage (mileage) based + good driving bonus

42%

Most appealing product design?Telematics Snapshot

Survey

Other Benefit Mechanisms Considerations:

- Discounted premiums - Free fuel (popular in SA) - Free miles - Retail discounts

Product Design - Tech. Platform

The technology platform is one of the key design decisions

Need to consider your market and future direction of

telematics devices

32

0%

5%

10%

15%

20%

25%

30%

35%

40%

Smartphone OBD II box -

policyholder

Other box -

professionally

OBD II box -

professionally

In car box - 12

volt connection

Other

What technology platforms have been considered?

Telematics Snapshot

Survey

The Customer Proposition

What does it take to get a

policyholder to agree to be

monitored?

The customer proposition is

the key to telematics

becoming widely accepted

33

0.00 1.00 2.00 3.00 4.00 5.00

Other value-add services (traffice data,navigation, supervision etc.)

Anti-theft

Breakdown and vehicle maintenance

The online experience and 'gameification'

Other financial incentives

Price discount

Overall Ranking

How would you rank the benefits to the policyholder?

Not-at-all55%

Minor contribution (<

$50)

42%

Significant contribution

($50+)

3%

Would customers be willing to make a contribution to technology costs?

Telematics Snapshot

Survey

Telematics Snapshot

Survey

Getting to Market

34

Who’s Driving / Who’s Involved?

Organisational-wide

commitment is required

Product and Senior

management are

leading the charge

Slight concern at the

lack of involvement from

marketing

35

0%10%20%30%40%50%60%70%80%90%

100%

What business areas are involved?

0%5%

10%15%20%25%30%35%40%45%

What business area is leading the telematics strategy?

Telematics Snapshot

Survey

Overseas experience

47%

Australian experience

31%

Own data22%

What level of evidence would you require?

Data – The chicken and the egg

How do you price the product as you build up the

experience?

What data would you require to launch a product?

36

< 250km, 9.7%

250 - 500km, 29.0%

500 - 1,000km, 25.8%

> 1,000km, 35.5%

How much data would be sufficient to estimate the risk profile of a driver?

Telematics Snapshot

Survey

None at all, 16.1%

Some knowledge of the players

overseas, 29.0%

Knowledge of vendors in the

Australian market, 16.1%

Active discussions with one or more

local vendors, 32.3%

Have established a technology

partner, 6.5%

What is your level of awareness regarding technology vendors in the insurance telematics space?

Technology Vendors

According to the survey only 36% felt their organisation

currently has the skillsets in house to implement telematics.

37

Telematics Snapshot

Survey

Data & Scoring

Need to determine which functions can be maintained in-house

and which require outsourcing

Who will look after the data?

Who will implement the driver scoring?

38

Vendor model, 19.4%

In-house only, 16.1%

Customised' vendor model

based on own views, 38.7%

Vendor model then in-house,

25.8%

How do you envisage that your organisation would implement driver scoring?

Vendor, 41.9%

In-house, 19.4%

Hybrid / transition over time, 38.7%

How do you envisage that your organisation would implement the data solution?

Telematics Snapshot

Survey

Where’s this heading?

39

Telematics – Future of Motor Insurance?

Most respondents believe < 10% penetration by 2019

Not a large difference in expectation based on organisations

telematics strategy

40

Telematics Snapshot

Survey

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2019 2024 2034

Will Not Implement/Only If Forced

<10% 10% - 25% 25% - 75% >75% Average

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2019 2024 2034

Lead/Fast Follower

<10% 10% - 25% 25% - 75% >75% Average

Without any telematics products:

Mkt Share 10.0%

COR 86.6%

Share of NB 10.0%

Telematics takes off, insurer does nothing:

Mkt Share 6.8%

COR 92.0%

Share of NB 5.2%

Mkt Share 8.6%

COR 88.3%

Share of NB 7.2%

Mkt Share 9.6%

COR 86.9%

Share of NB 9.2%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

% o

f Te

lem

atics P

olicie

s in t

he

M

ark

et

Low Med High

Telematics – Future of Motor Insurance?

41

Finity Telematics

Model

Projected market share under different

scenarios and strategies

The insurer’s situation if they didn’t have

telematics.

Low scenario – low market response and conservative pricing (-20%) Mid scenario – default market response and default pricing High scenario – high market response and aggressive pricing (+20%)

Distribution & OEMs

42

Mass-market6%

Via manufacturer

46%

Niche48%

Whats likely to be most successful distribution strategy?

What is the best way to distribute

a telematics product?

Data 'owner'/reseller

6%

Limited18%

Facilitator 'pre-market'

technology

27%

Integrated 'after-market'

i .e repair,

roadside, insurance etc

49%

Likely role of vehicle manufactuer?

Manufacturers are in a prime position

Telematics Snapshot

Survey

Who owns the data?

- Ultimately the policyholder

What can it be used for?

Loads of opportunities –

marketing, maintenance,

downloadable content

Questions?

43

Contact

Jon Tindall

Senior Consultant

Tel: +61 2 8252 3313

www.finity.com.au

Nelson Henwood

Principal & Director

Tel: +61 2 8252 3460

www.finity.com.au

Distribution & Use

This presentation has been prepared for the

Finity Consulting Personal Lines Pricing &

Portfolio Management Seminar, held on 22

May 2014. It is not intended, nor

necessarily suitable, for any other purpose.

Third parties should recognise that the

furnishing of this presentation is not a

substitute for their own due diligence and

should place no reliance on this

presentation or the data contained herein

which would result in the creation of any

duty or liability by Finity to the third party.

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