Telematic Car Insurance

The cost of car insurance premiums has traditionally been calculated following an evaluation of certain criteria. These include the driver's age (with drivers aged between 17 and 25 being charged the highest premiums), the characteristics of the car being driven (such as market value, engine size, whether the car has been modified or not, and the overall desirability of the vehicle), the driver's occupation and the risks associated with it, the driver's place of residence (with those living in urban areas paying higher premiums), the average annual mileage, the driver's claims history over a five-year period, and the excess amount that the insurance policy holder is willing to pay.

While these criteria have been useful in personalising the cover and cost of car insurance, in recent years the car insurance industry has been moving in another direction and towards 100 per cent customisable insurance policies. This has given rise to the appearance of telematic car insurance policies, which are based on the technnological systems that use GPS and wireless-enabled tracking to collect and store data about a vehicle.

Although telematic technology applied to motor vehicles has been used for nearly a decade, it was not until October 2004 that telematic car insurance was patented in the United States. The concept was soon adopted by many insurance companies from all over the world, and its success has been growing as more drivers switch to this type of insurance cover. A year after its implementation in the United Kingdom, insurance company Norwich Union estimated that drivers in the 18 to 23 year old age group who have switched to telematic insurance were 20 per cent less likely to be involved in a car accident than those who had regular insurance.

According to research carried out by the Association of British Insurers, it is expected that the number of drivers subscribing to this type of policy will reach 108 million worldwide by 2018. As of 2013, there are approximately 6 million valid telematic insurance policies in use around the world, but in just four years nearly 60 per cent of all British drivers could sign up for telematic insurance.

How do telematic insurance policies work?

Telematic insurance policies (also known as black box insurance) work by installing a small device under the vehicle's bonnet or in the car's chassis. Fitting the device takes approximately one hour and the process must be carried out by an approved provider. The devices (or black boxes) make use of GPS and 3G technology to monitor the driver's habits while behind the wheel. Some of the elements measured by telematic boxes include speed, acceleration and braking patterns, and the driver's skills when cornering, overtaking, or cruising. This comprehensive set of data is stored in the black box, but more importantly, the data is transmitted to the insurers, who can then assess more accurately the driver's premiums based on their individual driving skills and on the specific risk they run of being involved in an accident.

The common practice is for insurers to charge a sum up front, which covers the installation and the initial assessment. Generally speaking, telematic insurance premiums are quoted on an annual basis, and then reduced or increased monthly depending on the driver's performance. The fact that the premiums can be adjusted throughout the year allows for a fairer pricing system.

Advantages and disadvantages of telematic car insurance

Overall, the main advantage of using telematic insurance is a reduction in the price of premiums. This applies to young drivers in particular, who can see their premiums cut in half when switching to this type of car insurance. In the majority of cases, drivers can reduce their premiums by at least 25 per cent.

A second benefit involves a better awareness of the driver's skills behind the wheel, which can result in better, more considerate, and safer driving. Another pro is that stolen vehicles can easily be located if they are fitted with telematic devices. In the event of an accident where the driver wasn't at fault, the telematic box can provide insurers and lawyers with the necessary evidence to prove their case.

On the negative side, telematic car insurance is not for everybody. For example, drivers who clock in high mileages would not benefit from this type of insurance, as there are often limits regarding the number of miles that can be driven every month and surcharges apply to those who exceed the limits.

Moreover, many telematic policies disallow driving during peak hours (usually between 11am and 5pm), as the likelihood of being involved in an accident is higher at this time. Drivers who need to use their car during rush hour must pay a higher premium, which offsets the savings that characterise telematic insurance.

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