What if you would be rewarded for good driving behavior? What if that behavior would result in a discount on your premium? It is not a distant dream, but a real-life option. Pay How You Drive (PHYD) insurers offer a fair method for calculating the premium based on how safely you behave in traffic.

Sounds good, doesn’t it? But how is that behavior monitored? What happens to personal data? Can consumers be sure that it’s a fair product, as insurers claim it to be?

How IoT Has Entered the Automotive Industry: Pay How You Drive

In recent years, insurers have attracted new customers by leveraging the Internet of Things (IoT) technology, which, at the same time, also improves profitability. The IoT market is growing exponentially and is believed to further disrupt and improve business models within the financial services industry.

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Many insurers are familiar with the benefits of IoT technology. Though unknown to most consumers, PHYD insurance is an excellent and engaging example of IoT in insurance. So, let’s recap how Pay How You Drive works in practice. It enables insurers to determine the policyholder’s vehicle insurance premium based on their driving style. Moreover, the insurer can improve safe driving by providing feedback based on the customer’s driving behavior. A telematics device in the policyholder’s vehicle collects driving style data and sends this data to a central database of the insurance company for billing purposes. Data such as mileage, speed, location, the total duration of a trip, g-force can be collected. Besides the insurer, the telematics provider can also collect this data.

The accuracy of the Global Positioning System (GPS) data is crucial for determining the driving skills of a policyholder. However, environmental events can disrupt the GPS’s data quality. For this reason, the received data is contextualized through algorithms of GPS data and map matching.

Contextualization of the received telematics data improves the data quality and makes customization of policies possible. This contextualization is based on an algorithm that takes a range of factors into account, such as road condition, weather, and traffic events.

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Though often fully automated, these algorithms can contain biases that could become problematic when you rely on them for the customization of policies. As an insurer, you will have a possibility to assess the risks associated with the outcome of the contextualization. Ultimately, an insurance premium based on the driving style can be offered. A PHYD policyholder receives in most cases a discount on the premium when showing good driving behavior.

What Happens to Customer Data?

Telematics devices record a great deal of personal data, but where does it all end up? The General Data Protection Regulation (GDPR), enforced on May 25, 2018, imposes strict rules on capturing, using and saving this data. It increases the need for transparency towards the customers and introduces the “Privacy by Design” principle. GDPR ensures that organizations can only use data for the purpose for which it was collected. A more proportional collection and use of data (data minimization) should be the result, as well as clear communication towards the customer about the followed policy.

Telematics devices, however, by default collect as much information as possible-for contextualization purposes. All the collected information combined could be little short of a gold mine. It tells an insurer so much about driving styles and specific behavior or patterns at explicit locations that one could even argue that analysis of this set of big data could lead to a safer world. And isn’t that in the best interest of us all?

Unfortunately, applying the proportionality principle here is quite a challenge as the actual need for data will differ per situation. Explaining all this to customers in an uncomplicated manner will prove to be a complex endeavor. And even when explained properly, it remains to be seen whether the user is aware of what these devices record and how their personal data are being processed.

Contrary to what it’s designed for, users will most likely just ‘check the box’ and confirm they understand the privacy (and other) policies, especially when a financial gain is within striking distance. It is, therefore, highly probable that only a limited number of people will fully read or understand these policies. When was the last time you fully read a privacy policy? It is debatable whether PHYD policyholders would still use this product when they have a full understanding of how their data is being harvested, processed and applied. Though GDPR will likely improve efforts to increase customer awareness, the fact that Pay How You Drive may become the more affordable car insurance will probably prevail in customers’ decision-making process.

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Don’t Forget about Pay How You Drive's Grey Areas

Transparency and proportionality are not only relevant for the GDPR. Generally, insurers need to uphold certain ethical standard concerning their product offering. What’s more, ethical behavior is increasingly becoming a part of companies’ DNA. Several of these ethics, such as simplicity, clarity and reliability, should result in simple, easy-to-understand products as well as transparent and reliable settlement processes. Especially in the latter case, an open and efficient settlement process could become problematic with products like PHYD. The calculation of the premium is ultimately based on the data that is collected for a sequence of situations.

We will not dispute the accuracy of the Image: TelemEthics: How to Materialize Ethics in Pay How You Drive Insurance - Technology Vision for Insurance 2018 - by Accenture collected data. It’s an interesting, yet different topic. Instead, we will focus on the sequence of situations that provide interesting ethical challenges. For example, can the situations that lead to the premium calculation truly be assessed objectively? If not, can we trust an algorithm to do it for us? And if these algorithms direct both the assessment and management of the grey areas, will an insurer be able to explain how they came to a decision regarding a policyholder’s premium?

That leaves us with a range of complex and unanswered questions. How far does the transparency principle reach? Will the insurer be able to explain the discount based on events that can be singled out? Will the customer have the chance to challenge an accident-related event? Or even more interestingly, will they be able to challenge the algorithm? Who bears the burden of proof for the circumstances surrounding a specific event or incident? And how can the insurer guarantee that customers understand the product, including the algorithm and all relevant factors that will have an impact on these calculations, particularly before entering into any agreement about an insurance product?

How Can Your Business Approach Ethics?

Image: TelemEthics: How to Materialize Ethics in Pay How You Drive Insurance - Technology Vision for Insurance 2018 - by AccentureNo organization can sit back and relax without taking on important ethical questions. Customers, and employees too for that matter,  have increasingly high expectations of companies’ behavior, using their ability to address these issues as a differentiator. Creating a consistent set of principles will help insurers to meet these raised expectations. Companies leveraging IoT technology already often face ethical challenges as many upcoming technological trends that will transform society, artificial intelligence being one of the most prominent examples.

How can your business tackle these complex ethical issues? Let’s lead by example and start embedding a compliance culture where ethical questions can be addressed in an efficient and responsible manner. Set up an environment for innovating your organization and products. Take the lead and hit the road towards a data-driven future.

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