cognizant reports | august 2012

• Cognizant Reports

Executive SummaryWith the increased use of mobile communications, the stage is set for property and casualty insurers to develop more meaningful and mutually ben-eficial relationships with policyholders. Nowhere is this more clear than in auto/motor insurance, where advances in machine-to-machine (M2M) communication, or telematics, are rippling across the marketplace, generating data to more pre-cisely assess risk and reward for policyholders who adhere to safe driving practices.

For some time, auto manufacturers have provided connected vehicle services to discern-ing drivers. This includes GPS, emergency noti-fication, roadside assistance, concierge services and other offerings. Today, devices self-installed or plugged into a vehicle’s onboard diagnos-tics (OBD) port, or professionally-installed black boxes, transmit driving behavior and mileage data directly to carriers’ back offices. As a result, many carriers and brokers worldwide are lever-aging telematics data to create more precise rating variables that underpin new usage-based insurance (UBI) products. This represents a sea change in policy underwriting, where models

The New Auto Insurance Ecosystem: Telematics, Mobility and the Connected Car Insurers and auto manufacturers worldwide have set their focus on telematics as the next wave of creating deeper customer relationships, resulting in a convergence of new business models for the connected lifestyle.

have traditionally assessed risk and determined premiums based on group behavior (typically demographics-based) and proxy variables such as credit scores.1

As insurers’ risk models become more sophis-ticated through the use of analytics applied to UBI-generated data, a more precise driver profile will emerge. Analytics will also streamline and automate claims processes with real-time alerts and triggers, further reducing expenses for the insurer and validating a better segmented book of business.

As such, telematics-supported UBI programs are upending the traditional auto insurance business model. These programs benefit both insurers and consumers by providing data for better risk assessment, as well as incentive-based, “pay-as-you-drive” (PAYD) programs. This translates into more accurately priced insurance premiums and discounts for good driving behavior. By embracing telematics-informed UBI programs, our research shows, insurers can reap substantial returns on investment, as well as secure a stronger book of business, with reduced losses.

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UBI programs are moving into the mainstream, despite numerous technological, regulatory and privacy challenges. Many major insurers in Europe and the U.S. already offer them, and car makers are increasingly rolling out vehicles with embedded telematics, primarily to monitor vehicle safety, performance and failures. This convergence of safe driving and technology advances aligns with insurers’ incentives to add telematics-based UBI products to their offerings in order to attract drivers with better risk profiles through opt-in programs.

For their part, customers are increasingly express-ing interest in UBI products to help reduce their insurance costs. This is predicated on the UBI model’s ability to make insurance more afford-able for safe drivers, who have traditionally been treated on par with high-risk users. As insurers move to the next phase of UBI in the enterprise and adopt new business models, customer delight will be the focus, not the exception, as companies that embrace the changing landscape of mobility, telematics and an increasingly connected lifestyle will create new services and experiences for their policyholders.

UBI: Driving FactorsThe insurance industry is witnessing a major shift in how insurance is bought and sold. Customized products and services are increas-ingly being developed, thanks to technology that can derive meaningful insights from customer behavior captured at a multitude of touchpoints and through various means (e.g., smartphones, connected cars, telematics devices). Auto

insurers are increasingly using consumer behav-ior data generated by these sources to help craft UBI products.

Rising penetration of embedded telematics devices, as well as smartphones integrated with vehicle connectivity systems, offer insurers a pow-erful medium to reduce risk, optimize processes, serve policyholders in real-time and delight customers. According to Ptolemus Consulting Group, there have been 54 commercial launches and 94 trials of UBI underway worldwide, indicat-ing that UBI is reaching maturity.2

We believe the growth of the UBI market will be fueled primarily by the following forces:

• Evolution of a new insurance ecosystem.

> Growth of embedded telematics solutions.

> Connected vehicles.

> Mobility’s impact on UBI.

• Increasing adoption of UBI by carriers and customers.

• Regulatory changes supporting telematics adoption.

Evolution of a New Insurance EcosystemAs the demand for connected cars and lifestyles continues to rise, players in the new ecosystem — automakers, insurers, service providers — must work together to benefit from the rich customer data that is increasingly available. Doing so will help all constituents offer value-added services that can potentially drive revenue growth, reduce costs and improve the bottom line. While in-car

Figure 1

Source: IHS iSuppli

U.S. Telematics Sales Growth

0

5

10

15

20

25

30

35

2011 2017

Mill

ion

s

Sales of telematics units (OEM installed and aftermarket devices)

0

2

4

6

8

10

12

14

16

18

2009 2017

Mill

ion

s

Sales of OEM installed telematics systems, by type

Mobile Device Embedded

CAGR16.5%

CAGR22.2%

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connectivity will become ubiquitous, car makers will offer it primarily through embedded, tethered and integrated solutions. The growth in embed-ded telematics, demand for connected-car tech-nologies and mobile-based telematics solutions will create huge imperatives for auto insurers and their business models.

Growth Of Embedded Telematics Solutions Automotive companies are increasingly embed-ding telematics in vehicles to monitor system fail-ures and vehicle performance, while also meeting user demand for wireless connectivity. By the end of 2018, the proportion of new vehicles sold with embedded telematics is likely to reach 80% of cars on the road in the U.S. and 46% globally, according to iSuppli.3 The U.S. is forecast for sig-nificant growth in the sale of telematics systems (see Figure 1, previous page).4 Nearly 4.8 million, or 80% of global plug-in electric vehicles, are also expected to come equipped with advanced telematics systems by 2017, according to Pike Research.5 Europe is expected to be slightly ahead of North America and Asia Pacific in the penetration of telematics in new cars shipped by 2013, according to ABI Research (see Figure 2).

The growing volume of vehicles with embedded devices is expected to drive down device prices, encourage innovation and make it easier for insurers and customers to embrace UBI prod-ucts. Early signals appear to confirm this trend. State Farm and GMAC, for example, already offer their UBI products to subscribers of GM’s OnStar service, as well as Ford’s Drive Sync program.

Connected Vehicles: A New Paradigm Vehicles have evolved from mere transporta-tion mediums to advanced mobile connectivity platforms. At the center of this evolution is the connected-car technology that assists custom-ers in driving safely, avoiding accidents, lowering emissions, benefiting from insurance telematics and enjoying connected lifestyle services, such as on-demand entertainment, infotainment and concierge services.

Consumers’ increasing appetite for in-car con-nectivity, along with regulatory mandates for crash notifications and tracking stolen vehi-cles, are the driving forces behind auto makers offering connected-car systems (see Figure 3, next page). Declining hardware and connectivity costs driven by standardization and economies of scale are removing the traditional hurdles that had impeded the growth of connected-car systems, including high costs, limited consumer awareness, privacy and safety concerns.

Connected vehicle services enable insurers and car makers to assist customers when emergen-cies arise, enabling significant time savings and optimization of claims processes. In the case of an accident, connected vehicle services allow insurers to keep customers apprised of claim status, close claims faster and gain feedback, ultimately leading to increased customer satis-faction. In addition, these services improve auto safety by giving drivers hands-free calling and texting capabilities and providing timely naviga-tion and roadside-assistance services.

Figure 2

Source: ABI Research

Penetration of Telematics

80

60

40

20

20062005 2011 2012 20132007 2008 2009 2010

Pe

ne

trat

ion

(%

)

Percentage of new cars shipping with telematics

Asia-Pacific Europe North America RoW

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Mobility’s Impact On UBIRapid advancements in mobile technology, mobile application software and ubiquitous connectiv-ity are reshaping the telematics-supported UBI market. By 2017, car makers are expected to sell three times the number of mobile telematics systems sold in 2009, according to iSuppli.6 Smartphones already have capabilities such as GPS and accelerometers — connectivity simi-lar to telematics devices — enabling insurers to use them as viable aftermarket alternatives to on-board devices. Ptolemus Consulting estimates that smartphones will soon become the next “onboard unit” of the insurance industry.

Frost & Sullivan forecasts smartphone penetra-tion in North America to grow from 23.9% in 2009 to 67.1% percent of subscribers by 2015 (see Figure 4, next page). Smartphones’ ability to wirelessly connect to onboard devices using Bluetooth is expected to drive UBI growth. This will make it easy for insurers to use mobile telematics applications to track the driving activ-ity and behaviors of anyone with a smartphone.

In addition, using smartphones for insurance telematics solutions will help insurers and car makers easily share critical feedback on driving behavior with customers. It will also provide customers with a transparent and real-time feed-back mechanism to check their driving behavior and vehicle health stats. Innovative insurers can offer customers apps and plug-ins to test new telematics technology. With appropriate incen-tives, customers can be encouraged to participate in such trials.

In an industry with little differentiation in prod-ucts, and competitors quickly copying innova-tion, customer service is a major area for achiev-ing a competitive edge. Using mobility, insurers can fundamentally transform their engagement with customers. By interacting proactively and

frequently with customers and offering value-added services to replace sporadic and often transactional services, insurers can build brand loyalty and increase customer retention. In a highly competitive market with information-savvy customers, mobility will play an important role in marketing, selling and serving new products to attract and retain customers, especially younger drivers more prone to using such technologies.

Increasing Adoption of UBI by Carriers and Customers The number of insurance telematics users is projected to reach 89 million globally by 2017, growing at a compound annual growth rate (CAGR) of 90% from the 1.85 million estimated in 2010.7 Europe is expected to lead the insurance telematics market, reaching 44 million users by 2017 from the 1.5 million in 2010 (nearly half of the entire number of users across the globe).8 Moreover, telematics-based insurance is expected to cover 100 million vehicles by 2020, generating premiums of $60 billion, according to Ptolemus Consulting.

Pioneered by carriers such as Progressive almost a decade ago, more than half of the leading carriers in the UK and U.S. have a telematics insurance program today.9 In the U.S., Progressive has implemented a UBI product called Snapshot in over 40 states. Meanwhile, carriers such as Allstate, Hartford, GMAC, AAA, Travelers, Safeco and State Farm Insurance are actively conducting their own respective market trials and offerings.

Despite all of this activity in the U.S., European carriers such as Allianz, AXA, Norwich Union and many innovative brokers are ahead, having launched UBI programs and installed more telematics units than in the U.S.10

Customers are increasingly indicating inter-est in usage-based insurance offerings that

Global OEM Connected Car Systems

Year 2012 2017

Penetration (Millions) 11.4 60.1

Year 2012 2016

Shipments (Millions) 8.22 39.5

Source: ABI Research

Figure: 3

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reward good driving behavior with lower premiums. Already, telematics-enabled UBI pro-grams for personal auto insurance markets are being offered by carriers across North America and Europe. This is critical in markets such as the U.S., where many lower-income drivers find that their insurance premiums exceed their car loan repayments. In the UK, insurance premiums have risen 40% from 2010 to 2011 due to an increase in fraudulent claims.

Today, more than two million subscribers spread over five continents subscribe to telematics-sup-ported insurance policies, according to Ptolemus Consulting. The company expects UBI policies to exceed 140 million by 2020 globally.11 Within five years, UBI is expected to account for 20% of all vehicles insured in the U.S.,12 and by the end of 2011, Europe had 1,200,000 customers using telematics-based PAYD insurance, with a majority concentrated in France, Spain, Italy and the UK.13 Frost & Sullivan projects UBI activations in the North American market will rise from 137,000 in 2010 to 1.1 million by 2017, a 34.66% CAGR.14

In today’s challenging economy, many auto insurance customers are willing to switch car-riers if they are offered discounts on premiums (see Figure 5, next page) and rewards for safe driving. Moody’s warns that insurers that delay offering UBI will lose business to more proactive players.15 The latter will gain significant competi-tive advantage in pricing and policy retention by using precision pricing models that use variables more tightly correlated to loss costs.

Regulatory Changes Supporting Telematics AdoptionMany regulations are emerging that are expected to drive telematics adoption and thereby the potential for insurers to offer UBI products. For instance, the European Court of Justice’s Gender Ruling prohibits insurers from using gender as a criterion for underwriting. Telemat-ics-based UBI can help carriers by using non-gender-related parameters to accurately assess driver risk and comply with this regula-tion. The European Commission’s eCall,16 Russia’s ERA-GLONASS17 and Brazil’s SIMRAV18 are all mandates that require vehicles to be fitted with systems to assist drivers in emergencies. Upcom-ing mandates such as Contran 24519 require vehicles produced in or imported to Brazil to have GPRS20 vehicle tracking modules to reduce vehicle theft. The enhanced connectivity gained through these on-board devices makes it easier to assist drivers in an emergency and track and recover stolen vehicles.

Financial Benefits For insurers operating in a challenging environ-ment, telematics-based UBI presents a valuable opportunity to drive down costs through data-driven pricing and pass along discounts to customers, while enhancing the top line and shoring up the bottom line (see Figure 6, page 7).

• Top-line drivers: Popular UBI products such as manage-how-you-drive (MHYD)21 and PAYD22 allow carriers to offer premium discounts to customers based on certain driving

Source: Frost & Sullivan

Figure 4

Note: All figures are rounded; the base year is 2009.

U.S. Smartphone Market

Mo

bile

Su

bsc

rib

ers

(Mill

ion

s)

218.9 202.1 177.9 157.3 136.3 120.7 106.3

68.9 89.1 117.3 144.3 171.2 193.5 216.6

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015

Feature Phones Smartphones

Mobile device connections forecast (North America)

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parameters and behaviors. Carriers offer discounts of 5% to 10% for just signing up for UBI programs. Leading insurers claim that by using UBI, customers save 10% to 15% on their premiums and that this can increase to 30% based on their driving behavior and vehicle usage. Embracing UBI allows carriers to retain customers and acquire new ones from compet-itors lagging behind this market trend.

Additionally, telematics allows insurers to develop new auxiliary revenue channels, as car makers introduce add-on connected-car services, such as in-car entertainment, WiFi, real-time navigation and emergency and road-side assistance. Insurers offering additional value for the consumer will also offset the ini-tial costs of a UBI initiative.

Integration of smartphones with connected-car systems also offers a new source of reve-nue for players in the insurance telematics sup-ply chain. By 2016, Juniper Research estimates 92 million vehicles will have smartphone-integrated technology. Additionally, new pro-tocols such as MirrorLink from the Connected Car Consortium are expected to make smart-phone integration a standard feature on new vehicle models, according to Juniper. Machina Research estimates that by 2020, in-vehi-cle connectivity in 90% of new cars will add $600 billion in value to the connected life23 industry (see Figure 7, page 8) and $245 billion in revenues from the sale of connected devices and services such as PAYD auto insurance.

• Significant ROI and bottom-line drivers: Claims payout and related expenses consume up to 80% of insurers’ premium income. The following are the key UBI-based bottom-line drivers:

> Reduced claims volume: UBI programs encourage safe driving behavior that results in fewer accidents, helping insur-ers reduce claims payout and improve the bottom line. According to a Cisco Internet Business Solutions Group (IBSG) report, vehicle connectivity can contribute 30% to 80% of savings in claims and cost contain-ment. As insurers further analyze driving behavior, greater insights will emerge that will benefit underwriting and claims, as well as sales and retention.

> Reduced claims processing costs: Technologies such as advanced crash notification can provide first notice of loss (FNOL) for insurers to aid in response time and triage of claims, generating savings in overall claims expenses. With more accu-rate accident data available in real time — combined with geospatial data on roadways and other factors — insurers can more accu-rately and efficiently settle claims, detect fraud and offer immediate assistance, such as emergency response, tow, rental car and repairs.

Insurers can also deliver detailed accident information in real-time to service partners that offer roadside assistance and repair

Figure 5

Percent of respondents

Dis

cou

nt

Response base: 1,080 auto policyholders

Source: Deloitte Automobile Consumer Survey 2012

Telematics IncentivesHow much of a discount would policyholders require to install a telematics device to monitor their driving experience?

47%

22%

17%

11%

2%

0% 10% 20% 30% 40% 50%

Over 20%

16%-20%

11%-15%

6%-10%

1%-5%

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services. This further streamlines claims processing and enables volume discounts, as they can route claims to authorized and connected service partners. Faster claims processing results in higher customer satisfaction, lower costs for repair and towing, and lower risk of disputes and claim costs — all of which contribute to the bottom line with reduced losses, reduced loss expense, reduced severity of claims and reduced fraud.

Insurers have the most to benefit from connected cars and telematics. According to the Cisco IBSG report referenced earlier, vehicle connectivity can save an average of $280 per connected vehicle per year in crash-related value and an additional $100 across the insurance value chain (see Figure 8, page 9).24 Additionally, vehicle connectivity can prevent 80% of reported crashes and reduce 20% to 30% of costs incurred in enforcing traffic laws (see Figure 9, page 10).

UBI Benefits

ECONOMIC BENEFITS

Top-Line Drivers Effect Impact

Launch of UBI products Arrest customer attrition Protect top line

Launch of UBI products Acquire new customers Drive top-line growth

Launch of UBI products Improve renewal retention Drive top-line growth

Connected-car systems Improve customer response time Create customer delight and improve retention

Bottom-Line Drivers Effect Impact

UBI-incentivized safe driving Reduce chance of accidents Lower claims volume and costs

Event data generated by telematics Enhance efficiency of claims processing

Lower claims processing costs

Event data generated by telematics Enable early detection and prevention of frauds

Lower fraudulent claims cost

Reduction or elimination of towing Reduce downtime, tow charges, impound fees and rental car costs

Reduce or eliminate associated costs

Automated subrogation recovery Establish fault, reduce cycle time in claims processing

Lower claims costs and cost of operations

Driving behavior data availability Enable pricing based on risk profiles Lower customer acquisition costs

Investments in technologies to adopt UBI

Upfront and ongoing costs: Devices, connectivity, data capture, storage, analysis

While UBI entails its own set of costs, they are offset by the net benefits vs. traditional insurance products

SOCIETAL BENEFITS

Drivers Effect Impact

Encourage safe driving Reduce chance of accidents Enhance safety levels of citizens

Encourage safe driving Reduce chance of accident severity and loss of lives

Create safer roads, less accident-prone scenario

Fight vehicle theft Allow efficient tracking and recovery of vehicles

Lower societal expenses

Accurately assess risk for pricing Reward safe drivers with lower insurance premiums

Enable affordable insurance

ENVIRONMENTAL BENEFITS

Drivers Effect Impact

Increase use of congestion-free routes and limit vehicle usage

Reduce fuel consumption Create a cleaner environment

Data on vehicle health statistics Improve vehicle maintenance Reduce Co2 emissions

Source: Cognizant Research Center Analysis

Figure 6

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> Reduced costs related to fraudulent claims: Data from the National Insurance Crime Bureau indicates that more than 10% of P&C claims are fraudulent, adding up to over $30 billion annually and leading to across-the-board increases in premiums for customers. Using analytics and real-time information generated by telematics devices, insurers can weed out fraudulent claims. Employing analytics can help insur-ers reduce up to 80% of fraudulent claims, according to the same Cisco IBSG report.

To reap the benefits of UBI, insurers need to invest in telematics devices and infrastructure. This entails upfront and ongoing costs, includ-ing telematics data management, analytics and connectivity costs. These costs will vary based on whether devices are installed by a third party or are self-installed, as well as data transmission

expenses. Additional fees — including consulting, integration, analytics, new services, software and subscriptions — vary by provider and geography, etc. However, the net benefits of telematics-based UBI products outweigh the costs incurred.

Societal and Environmental Benefits There is growing recognition by carriers, customers, regulators, environmentalists and consumer and safety advocates that telemat-ics-based UBI products offer many monetary, societal and environmental benefits. UBI provides an incentive for customers to drive safely, thereby reducing accidents, lowering the severity of accidents and saving lives. Other benefits include enhanced highway transporta-tion systems, reduced road congestion, reduced costs for recovering stolen vehicles and increased consumer-oriented services.

Connected-Life Business Impact

Connected life is a world where devices that are seamlessly connected to each other allow consumers to

enjoy services and experiences on-demand, anywhere and anytime.

Category of Impact Type of Benefit

Connected-life market revenue Connected PAYD insurance device, device/service management, provision of connectivity and sale of PAYD insurance.

Connected-life service improvements The ability to better tailor insurance policies to individual driver needs.

Connected-life cost reduction Cost reductions for drivers by paying only for needed coverage; cost reductions for insurers through higher quality information and the ability to better manage risk and enforce policy terms and conditions.

Top 10 Connected Applications in 2020 Value to the Connected Life

Connected Car $600 billion

Clinical Remote Monitoring $350 billion

Assisted Living $270 billion

Home and Building Security $250 billion

Pay-As-You-Drive Car Insurance $245 billion

New Business Models for Car Usage $225 billion

Smart Meters $105 billion

Traffic Management $100 billion

Electric Vehicle Charging $75 billion

Building Automation $40 billion

Source: Mobile World Congress

Figure 7

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Figure 8

Source: Cisco IBSG, 2011

Connected-Car SavingsAnnual benefits per connected passenger vehicle, by source

NewProfit Pools

Auto OEMs

Auto OEMs& Dealers

Car Insurance

Government $430

$380

$280

$180

$100

$1,400

Lower fuel usage, emissions, congestion

Avoidance of crashes and associatedsocietal cost

Improved service, retention; lower service, warranty costs

Decreased electronic vehicle architecturecomplexity and cost

Point of interest, location-based services,car sharing, app store for the road, etc.

UBI also makes insurance more affordable for safe drivers, who have traditionally been treated on par with high-risk users. According to the AA British Premium Index, the average cost of car insurance is very high for 17- to 22-year-olds, averaging £2,481. In its study of 10,000 driv-ers aged 17 to 25 years, Cooperative Insurance Company (a UK-based carrier) found that those with telematics-based insurance were 20% less likely to be involved in a car crash, and their average cost of claims was 30% lower than driv-ers with traditional insurance. The company is, therefore, offering safer young drivers discounted renewal premiums (£790) that are nearly half its average young driver premium (£1,300).25

Insurers and car makers are also deploying gamification to promote safe driving behavior. An example is Nissan’s Leaf model, which uses the company’s "Eco Mode" software to collect variables such as power usage and speed to provide feedback to drivers on their driving, using a display located behind the steering wheel. Meanwhile, other insurers are using vital rating stats from driving data gathered through apps running on smartphones, connected to vehicles, to rate drivers for safe driving and use the score to offer premium discounts.

As drivers become aware of the savings they can realize by limiting how much they drive and how they drive, they are likely to alter their behav-ior. The result: fewer crashes and reduced traffic congestion, fuel consumption and emissions.

Challenges Insurers face significant challenges in implement-ing telematics-based UBI. They must overcome region-specific and stringent regulations, cus-tomers’ privacy concerns and the need to develop capabilities for managing, mining and analyzing complex telematics data, all within a fragmented telematics ecosystem.

• Regulatory issues: In the U.S., each state has its own laws and rules for telematics-based UBI. Further, each state has different requirements covering such products, which creates operational complexities for cross-state carriers. For instance, Illinois requires carriers to publicize their underwriting models, while California limits parameters for product pricing. This hampers insurers’ ability to create competitive products and protect their IP. While regulators favor lower premiums for good driving, they do not have a clear stand on raising premiums for bad driving, impacting carriers’ competitiveness.

• Privacy issues: An early significant hindrance to UBI adoption, especially in the U.S., is consumer concern over the types of data being collected, particularly related to GPS location, braking patterns and speed. Issues related to privacy infringement, and how insurers will handle this data, are seen as potential roadblocks for UBI adoption. Insurers need to continually allay customer fear over how they will protect customer privacy. It will be a significant challenge for insurers to con-vince customers and privacy advocates and

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regulators that consumer information will be secure and used only as stated.

• Operational issues: Insurers are often overwhelmed by the storing and analysis of the massive amounts of data generated by telematics. Also, UBI projects are extremely complex in nature, requiring extensive data management and analytics capabilities.

Insurers also face challenges resulting from the fragmented telematics ecosystem, in which many auto makers, insurance carriers, telematics service providers and new play-ers are vying for a slice of the market with software and connected navigation products. Insurers may find it difficult to pass on the costs of device acquisition, installation and operation to customers.

Further, the plethora of telematics devices available on the market make it difficult for insurers to determine which device best suits their needs. With patented UBI technologies and no publicly available repository of users’ driving data, insurers face an uphill challenge in quickly starting a UBI program. Most have begun with a pilot program to test and review devices and data capture, assess the impact

to their existing systems and incorporate into their UBI product design, with the intent of moving forward with a UBI offering.

• Challenges with smartphone-based tele-matics: The telematics-based insurance eco-system is as heterogeneous as the mobile ecosystem, and the combination increases overall complexity. A lack of standardization in data and auto platforms makes it challenging for insurers to integrate mobile devices into their IT infrastructure. Also, mobile devices are a potential distraction, as drivers use them for calls and texting while driving, which is a major cause of accidents. Also, insurers need to authenticate whether the mobile device was indeed in the vehicle at the time of driving.

Many factors are beyond the insurer’s con-trol, including whether the driver is carrying his or her phone while driving, that the device is not being carried by someone else, that the smartphone is charged and that relevant insurance apps are running. As the device is not tied to the vehicle, insurers will not be able to offer stolen vehicle services. Smartphone devices are not as rugged, secure or reliable as embedded onboard devices, and they open

Figure 9

Source: Cisco IBSG estimates, 2011

UBI Ripple EffectImpact of vehicle connectivity on U.S. insurance value chain

Usage &Behavior

CrashPrevention

Fast & CorrectResponse

Claims & CostContainment

Connected LawEnforcement

$715BAddressable Cost Base

$515B Crash Costs

+$165B Insurance Premiums

+$35B Traffic Services / Law Enforcement

10% - 30%Premiums

20% - 35%of Crashes

5% - 15%Savings

30% - 80%Savings

20% - 30%Savings

• PAYD: Usage-based insurance• MHYD: Driver-behavior-based insurance

• Vehicle health monitoring and maintenance• Driver vitals monitoring / distraction alerts• Safest-route guidance• ADAS + V2V + V2I: passive and active correction

• eCall/ACN reduces severity of injuries and saves lives• Virtual black box transmits vehicle crash data/video• Driver vitals/health data transmitted to first responders

• Reduction of survey and investigation costs• Fraud prevention and reduction (~80%)• Stolen vehicle tracking/location• In-network partners with pre-negotiated rates

• Pay as you speed• Virtual violation detection and notification• Automated payment

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up greater opportunity for device tampering, lowering insurer trust in the data generated by these devices.

The Road Ahead The insurance industry is undergoing a radi-cal makeover, shaped by rapid advancements in technology and consumer behavior and pref-erences. Forward-looking insurers need to assess their current business models in light of chang-ing marketplace and consumer requirements. Meeting customer needs and serving them well will be key to continued growth. Telematics and mobility have immense potential to help insur-ers by improving the quality and frequency of customer interactions.

Build Winning Strategies As in any highly competitive market, gaining the first-mover advantage in the telematics arena will be critical. Proactive insurers should create systems that can manage data collected from telematics-based UBI programs, as well as employ powerful technologies such as analytics to glean useful insights from this data about customers and their preferences. Easing customer concerns about privacy issues will aid in improving market penetration, and providing customers with visibil-ity into the data captured about them and how it is used will help build much-needed trust.

Identify the Right Partners Identifying the right partner is critical for insur-ers planning to enter or strengthen their foothold in the telematics-based UBI market. With data being central to the success of any UBI program, insurers should choose a provider that can offer end-to-end data solutions, as well as strong expertise in aggregating, storing and analyzing large volumes of data.

As the market evolves and consumer preferences change, insurers also need solutions that are flex-ible and scalable. Service providers should exhibit deep expertise in the insurance sector and thor-ough knowledge of the markets in which they operate. Insurers should also look for partners that can deal with multiple telematics devices and data platforms and provide flexible, pay-per-

use pricing models and managed services. As UBI products and accompanying value-added services emerge, the partner should also offer UBI admin-istration and business process optimization. In addition, the partner should have relationships with car makers to help insurers offer additional value-added services for a connected lifestyle.

Service providers should also have strong alliances with telematics platform providers and device manufacturers, as well as deep exper-tise in integrating these devices with enterprise systems. As telematics-based UBI is still evolving, insurers should choose a partner with strong project management experience and the ability to offer strategic consulting on develop-ing a roadmap for telematics-based products that suits current as well as future requirements. (For more details, read our report, The Telematics Advantage: Growth, Retention and Transforma-tional Improvement with Usage-Based Insurance.)

Insurers will also need a service provider that can develop strategies for archiving raw data feeds for future analytics, as well as addressing long-term data integration needs. Given the competitiveness of the market, partners should also offer innovative solutions that can address the significant challenges insurers face when entering this market.

Embracing New Business Models Increasingly, customers are demanding products and services tailored to their needs. Consumers looking to save money in a challenging economy are finding telematics-based UBI attractive. Insur-ers, too, are finding they can no longer afford to rely on traditional business models, espe-cially when disruptive forces such as telematics, mobility, the connected car and analytics are redefining the core of the market. Further, advances in technology that make telematics devices more convenient, affordable and effective will drive the growth of telematics in insurance.

Winning insurers will look to continually engage customers in innovative ways, offering high- quality value-added services to meet their evolving needs.

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Footnotes1 Stephen Brobeck and J. Robert Hunter, “Lower-Income Households and The Auto Insurance

Marketplace: Challenges And Opportunities,” Consumer Federation of America, January 2012, http://www.consumerfed.org/news/450.

2 “How UBI Will Radically Change Insurance Economics,” Ptolemus Consulting, Telematics Update, 2012, http://us.telematicsupdate.com/fc_tele_evupdatelz/lz.aspx?p1=05900062S2941&CC=&p=1&cID= 0&cValue=1.

3 “Embedded Telematics in the Automotive Industry,” IHS iSuppli, November 2011, http://gallery.mailchimp.com/e68b454409061ef6bb1540e01/files/Embedded_Telematics_in_the_Automotive_Industry_sw_iS.pdf.

4 Anna Buettner, “U.S. Continues to Lead OEM Telematics Market,” IHS iSuppli, January 2011, http://www.isuppli.com/automotive-infotainment-and-telematics/marketwatch/pages/us-continues-to-lead-oem-telematics-market.aspx.

5 Cheryl Kaften, “By 2017, Most PEVs Will 'Get the Show on the Road' with Advanced Telematics,” Tech-nology Marketing Corp, June 2012, http://m2m.tmcnet.com/topics/m2mevolution/articles/293733-2017-most-pevs-will-get-show-the-road.htm.

6 Anna Buettner, “U.S. Continues to Lead OEM Telematics Market,” IHS iSuppli, January 2011, http://www.isuppli.com/automotive-infotainment-and-telematics/marketwatch/pages/us-continues-to-lead-oem-telematics-market.aspx.

7 “89 Million Insurance Telematics Subscribers Globally by 2017,” ABI Research, February 2012, http://www.abiresearch.com/press/3845.

8 “Europe to Lead Insurance Telematics Market, with More Than 44 Million Subscribers by 2017,” ABI Research, June 2012, http://www.abiresearch.com/press/3924.

9 Catherine Stagg-Macey, “Telematics-Based Insurance: Has Its Time Finally Arrived?” Celent, January 2012, http://www.celent.com/reports/telematics-based-insurance-has-its-time-finally-arrived.

10 Mike Hales, Joe Reifel, Gang Xu and Andrew Beebe, “Insurance Telematics: The Game Changer,” A.T. Kearney, March 2010, http://www.insurance-telematics.com/topics/insurances/insurance- telematics-the-game-changer/13-658.htm.

11 “Insurance Telematics,” Ptolemus Consulting, 2012, http://us.telematicsupdate.com/fc_tele_ evupdatelz/lz.aspx?p1=05900062S2941&CC=&p=1&cID=0&cValue=1.

12 “Usage-Based Insurance,” National Association of Insurance Commissioners, June 2012, http://www.naic.org/cipr_topics/topic_usage_based_insurance.htm.

13 “Insurance Telematics,” Ptolemus Consulting Group, May 2012, http://www.ptolemus.com/insurance-abstract.

14 “Mileage-Based Premium Drives the Telematics-Enabled Usage-Based Insurance Market,” Frost & Sullivan, June 2011, http://www.frost.com/prod/servlet/press-release.pag?docid=235476916& gon11071=ATMI2.

15 “Moody’s: Auto Insurers Offering Usage-Based Products Gain Advantage,” Insurance Telematics, December 2011, http://www.insurance-telematics.com/topics/insurances/moodys-auto-insurers- offering-usage-based-products-gain-advantage/13-970.htm.

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16 An initiative by the European Union that helps motorists receive immediate assistance when they are involved in a collision anywhere in the EU region.

17 An emergency response system that automatically activates and transmits the vehicle’s coordinates to the nearest emergency response center to provide emergency services.

18 Legislation introduced by the Brazilian government to fight high levels of vehicle crime.

19 A law enacted by Brazil to fight vehicle theft by using GPRS modules that allow vehicles to be tracked and immobilized.

20 General Packet Radio Services.

21 Allows users to reduce their premiums by improving their driving using the feedback provided by the insurer.

22 Allows users to pay insurance based on how much a vehicle is driven during the policy term. Users can pay for the miles they expect to drive either in a lump sum or installments, allowing insurers to offer rebates for unused miles and charge for any extra miles driven. Alternatively, users can pay the premiums based on time, such as monthly or bi-monthly vehicle usage.

23 A world with devices that are seamlessly connected to each other, allowing consumers to enjoy services and experiences on-demand, anywhere and anytime; http://connectedlife.gsma.com/ overview-and-vision/.

24 “Connected Vehicle Insurance: The Business of Preventing Crashes,” Cisco, April 2011, http://www.cisco.com/web/about/ac79/docs/mfg/Connected-Vehicles_Insurance.pdf.

25 “Twenty Percent Drop in Car Accidents Thanks to Telematics Insurance,” The Co-operative Banking Group, April 2012, http://www.co-operativebankinggroup.co.uk/servlet/Satellite?c=Page&cid=1326094872357&pagename=Corp/Page/tplCorp&currart=1334211464216&currmth=4.

References• “2012 Global Insurance Outlook,” Deloitte, 2012, http://www.deloitte.com/assets/Dcom-UnitedStates/

Local%20Assets/Documents/FSI/US_FSI_Global%20Insurance%20Outlook%202012_011312.pdf.

• “The Connected Car – Finally Coming True?” Arthur D. Little, 2012, http://www.adlittle.com/downloads/tx_adlreports/ADL_AMG_2012_Connected_Car.pdf.

• “Connected Car Market Speeding Ahead,” Connected World, June 2012, http://www.connected worldmag.com/latestNews.aspx?id=NEWS120601060257683.

• “Driving Operational Excellence in Claims Management,” Deloitte, February 2011, http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/FSI/US_FSI_DrivingOperational ExcellenceInClaimsManagement_022311.pdf.

About Cognizant

Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50 delivery centers worldwide and approximately 145,200 employees as of June 30, 2012, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world.

Visit us online at www.cognizant.com for more information.

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© Copyright 2012, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.

Credits

Author and AnalystAala Santhosh Reddy, Senior Research Associate, Cognizant Research Center

Subject Matter ExpertsKimberley J. Gunther, Telematics Practice Leader, Cognizant Insurance Business Unit Jeff Wallace, Assistant Vice President and Cognizant Mobility Practice Leader

DesignHarleen Bhatia, Creative DirectorSuresh Sambandhan, Designer

The author would like to acknowledge the research support provided by Saket Ganeriwal, Senior Research Associate, Cognizant Research Center.

For more information on usage-based insurance, please contact us at inquiry@cognizant.com.