Controlled Risk

At its most fundamental, insurance is a risk management strategy. Insurance consumers – businesses or individuals – transfer their potential for loss to insurers, creating a balance between the amount of risk transferred, their own premium tolerance and appetite for hazard, and the insurer’s assessment of the danger.

Risk management, however, is also about reducing the overall potential for loss, with less total risk to be transferred or retained. The most successful scenarios occur when informed, engaged policyholders understand the direct impact that their risks have on other factors, such as cost and insurer inclinations, and take steps to mitigate their exposures.

The balance changes, of course, whenever new ways are devised to measure risk. By changing how the factors that define exposure are evaluated, that equilibrium among hazards, mitigation and transfer, premiums and other possible costs are also affected. Recognizing the inter-relationships among all these elements is crucial to any risk management model, new or old.

If consumers are to effectively govern their own risk, they must understand what the defining criteria are, how they impact their rates and protection, and what their choices are.

One relatively new school of thought, evolving out of predictive analytics, has the potential to greatly enhance consumers’ ability to manage their exposures. Telematics, or UBI (usage-based insurance), is a means of monitoring and underwriting risk, which has been made possible by mobile technology and insurers’ burgeoning capacity to analyze vast quantities of raw data. The technology is particularly well-suited to documenting vehicle usage.

Telematics devices collect information “live” and report electronically on a slew of details deemed to characterize the individual auto and its drivers, such as patterns of motion, locations or time of day. The information might be used in a variety of ways – overseeing corporate fleets, extracting information following an accident, monitoring road conditions or documenting individual driving habits. Insurers could employ it in place of more traditional formulas to provide a more individually tailored assessment of risk and, consequently, of the required premiums.

As a risk management tool, the potential power of the immediate feedback is obvious. If drivers and vehicle owners can see the plain facts about their own driving patterns and the hazards resulting from those patterns, they can also act to adjust behaviour identified as unsafe. Subsequently, once they have amended their conduct, they should also be able to see the effect in the information collected and the conclusions drawn.

For any new insurance telematics model to succeed and stay true to insurance’s original purpose as a means of controlling risk, this participation by consumers who are informed and empowered to affect their own situations is key.

Telematics information is powerful, but power can create other vulnerabilities. The data collected is also intensely personal. Consumers could, in fact, be disadvantaged if data is handled improperly or without due control resting with its subjects.

For example, customers who do not have access to the details of their own information will have no means to amend driving patterns and mitigate their exposures, frustrating any desire for self-management. If they cannot select where to direct their personal data, including any accumulated history, and share it with the insurers of their choice, their options for transferring risk will also be curtailed.

Similarly, clients’ risk management decisions will be impaired if they are based on information that is biased, edited without regard to the client’s best interests, or does not indicate all the available options. Also, if a consumer’s personal data is redirected and used for some other, unintended purposes – such as targeting marketing efforts for other products – that individual will be forced into a more vulnerable position.

Recognizing the potential of telematics for both the benefit or detriment of consumers, the Insurance Brokers Association of Canada (IBAC) has recently released a position paper on the topic. The paper outlines principles that brokers believe are essential to ensure the protection of the consumer, and their empowerment to manage their own risk within telematics insurance models.

There are three key concepts:

• Consumers have the right to control and ownership of data relating specifically to themselves, their families and their businesses.

As the kind of data collected by telematics devices, such as driving habits and patterns, is personal and identified with individuals, IBAC asserts that is “personal information” as understood by the Personal Information Protection and Electronic Documents Act (PIPEDA) and parallel provincial statutes. Telematics data is, therefore, subject to the same privacy guarantees, and consumers must be able to choose whether or not to share their personal information with an insurer or, for that matter, any third party.

Further, customers will expect clarity and transparency regarding any conclusions drawn from that information, so they can be proactive in mitigating their exposures. While, of course, insurers’ own algorithms would be proprietary, consumers who decide to share their data would still have the right to know how their information is used, what factors determine their risk status and generally how variables may impact them. Consumers would need to have that educational opportunity to be able to amend their driving behaviour and improve an assessed risk profile.

As no system is perfect, a mechanism to challenge the veracity of information collected would also be necessary, to allow customers to correct or halt the collection of information at any time.

• Information must not be collected and used for any purpose other than that for which it was intended.

As PIPEDA clearly states, consumers must be guaranteed that their personal information accumulated for one reason, such as assessing insurance risk or credit granting, will not be used for any other purposes.

This precept goes beyond the simple and obvious necessity for trust between insurance purchasers and their providers, but speaks to society’s overarching responsibility to protect consumers from unfair practices.

In a similar vein, IBAC suggests that the data used to evaluate a customer’s driving profile for risk management purposes should not affect that same individual in the event of a claim. Further, no one should be obligated, nor penalized, for refusing to relinquish his or her privacy.

Of course, there are always exceptions to this rule, as there are under PIPEDA, including situations where law enforcement or national security requires information to be disclosed.

• Consumers have the right to choice, to qualified and objective advice, and to autonomous advocacy.

IBAC’s position is that personal information used for risk assessment purposes should be communicated in a common standard format so that consumers can more easily access, share or consult about their own data. Consumers must be able to seek advice from the advisors and providers that they choose, moving freely between providers if they so desire, to best govern their own risk situation.

Clients must know whether or not they are making educated decisions using objective information, and must also be informed if any advice they receive comes from those who are proposing to assume their risks – as that counsel should not be considered impartial.

Insurance products are not simple, and the risk management function they serve is complex. Telematics models could prove a useful tool to handle some of the complexity, that is if they are designed and implemented with a clear prime directive of mitigating risk, with empowered consumers as proactive and informed partners.

In Canada, insurance telematics plans are still largely in development, but some early adopters are start
ing to reach the market. As the science matures, it remains to be seen whether or not the market participants will capitalize on telematics’ fullest potential.