Telematics Essay

692 Words2 Pages

Telematics is a new method brought about by some insurance companies to charge premiums from clients based on the driving behavioral information collected by the device attached to cars. This new method breaks through the usual manner of pricing the insurance policy which involves insurers gathering statistical data and preparing it to check which people fit into what categories. They are then charged premiums accordingly. However, with the usual pricing strategy, there has been a problem of adverse selection (a market failure where bad products are more likely to get selected because of little information to either buyer or the seller), where the insurer does not fully know the risk that the client faces. Telematics can help against the issue of adverse selection depending upon how consumers open up to this policy, and the implementation of such policy may be more effective than the usual insurance pricing policies.

Insurance companies make profits by charging premiums to the customers. These companies have to pay to the customers when claims are put forward and insurance companies benefit if they pay less than what they state in the policy. Customers who purchase the insurance often have the private information of how much risk they face that they do not fully share with the insurers in order to avoid high premium charges. This unavailability of private information leads to insurers bearing extra risk for which policyholders do not pay. Therefore, in order to decipher the behaviors of the drivers to figure out the risk, insurers collect information regarding the age, sex, marital status, driving record etc. However, this method is not efficient. The premiums of such policy are not exactly related to the “actual intensity or ris...

... middle of paper ...

...eral trend moves towards using UBI policies, in the future, many people and governments might adhere to Telematics, leaving no choice for aggressive drivers, whereby eliminating the problem of adverse selection. Thus, Telematics can prove to be the solution to the problem of adverse selection and will help set effective insurance premiums that best suit customers.

The market failure in the insurance market that has existed for so long may finally be corrected with this policy. Insurers can be surer of the risk that they calculate with Telematics and charge right premiums. As assessed above, this policy may solve the problems of adverse selection and will help the society in general with less accidents, traffic and CO2. Thus, I believe the, with the growing popularity and benefits it has shown, Telematics is a better policy than the usual insurance policies.

Open Document