Insurers Open Black Box to Escape European Gender Ban

Motor insurers seeking to get around a European ban on charging male drivers more than women are turning to innovative black box technology that could trigger an upheaval in the way car insurance is sold.

Britain’s biggest motor insurer, Royal Bank of Scotland, is among those testing the technology, which allows insurers to monitor customers through devices in their cars, and charge according to how riskily they drive.

Insurers, previously deterred by the high cost of so-called telematics insurance, now see it as their best hope for avoiding price hikes that could drive some customers away once the ban comes into force next year.

“There’s a renewed interest, not least because of the gender directive,” said James Rakow, insurance partner at consultants Deloitte.

“Most definitely, this second wave of interest seems to have got a foothold in the market.”

Women, who currently pay less for car insurance than men because they are statistically less likely to crash, face an 11 percent price increase once the ban takes effect, according to research commissioned by Germany’s GDV insurers’ lobby.

Insurers fear that could price some women drivers out of the market altogether, sapping revenues. Using telematics to set premiums according to customers’ risk profiles allows the industry to keep offering lower prices to most women while staying on the right side of the law.

Insurers’ renewed interest in the technology also reflects a drop in its cost, said Richard King, chief executive of Ingenie, a British start-up backed by ex-England footballer Gary Lineker that uses telematics to offer affordable cover to young drivers.

“The technology has got an awful lot cheaper and a lot more sophisticated. I think it reached its tipping point last year,” King said.

High overheads forced Aviva, Britain’s second-biggest insurer, to abandon Europe’s first major trial with telematics insurance in 2009. But the experiment achieved a 27 percent cut in premiums while reducing claims by almost a third, and Aviva said it “continues to evaluate the technology”.

Telematics is gaining ground worldwide, with insurers accounting for 60 percent of the U.S. market offering some form of the technology, as are big European players including Allianz and Axa, according to risk management consultant Towers Watson.

But analysts say British insurers are leading the way in using telematics to build up a complete picture of driver behaviour, in contrast to simpler applications elsewhere that seek to curb claims by enforcing limits on single risk factors such as speed.

The British insurance industry hopes this will over time allow it to actively persuade customers to drive more safely by offering lower premiums as a reward, triggering a virtuous circle of falling claims.

The European Union’s “eCall” initiative, which aims to ensure that by 2015 car makers fit vehicles with devices that automatically dial for help in the event of a crash, could give telematics insurance a decisive boost by allowing it to piggy-back on a ready-made technological infrastructure.

However, take-up of telematics technology by the mass insurance market could have profound consequences, analysts warn.

The disappearance of standardised pricing would likely challenge so-called aggregator websites such as Admiral’s Confused.com, which allow consumers to compare quotes across the market, and have become one of the biggest sales channels for motor insurance in the UK.

“Once you get to a situation where it’s difficult to compare tariffs simply, it’s going to be difficult for anybody doing like-for-like comparisons,” said Deloitte’s Rakow.

By making explicit the connection between safe driving and cheaper insurance, telematics could also encourage car makers to offer cheap cover as an incentive to buy vehicles fitted with extra safety features, encroaching on insurers’ territory.

“In that circumstance the insurer is demoted to a wholesaler and the car maker becomes the broker,” said Tony Lovick, a Towers Watson consultant and former Aviva executive.

“If I was an insurer I’d be thinking about that and wondering how I could immunise myself against more market upheaval.”

Insurers must stop charging men and women different prices from December next year, the European Court of Justice said in March after ruling that the practice “constitutes discrimination.”