Expert Commentary

Benefits of Telematics to Motor Vehicle Service Contracts

Vehicle telematics technology has been around for several years in the personal and fleet automobile insurance industry. This convergence of technology, insurance, and innovation benefits a variety of segments—insurance companies, consumers, regulators, car manufacturers, industry suppliers, and the general public—in a myriad of ways.

Regulation & Compliance
June 2016

Despite its beginnings in the personal and fleet automobile insurance industry, there is an emerging recognition of the value of telematics to the motor vehicle service contract industry.

What Is Automobile Telematics?

It's important to work from a common understanding of vehicle telematics, which can oftentimes be referred to as "usage-based insurance." According to the National Association of Insurance Commissioners (NAIC), vehicle telematics has been around for at least 15 years, having been pioneered in the personal automobile insurance space by Progressive Insurance.1

Telematics is the recording of an automobile's activities, which observes the vehicle's performance and the driver's behaviors. Such recordings—oftentimes via a device installed in the automobile—can be captured and reported in real time leveraging GPS technology.2 Telematics technology is very similar to the "black boxes" installed in airplanes that record pilot and aircraft behaviors.

What Are the Benefits of Telematics?

There are several benefits to vehicle telematics to the motor vehicle service contract industry. The two most prominent areas revolve around pricing and claim adjudication/loss avoidance.

Pricing. Although pricing has higher relevance for personal and fleet automobile insurers where negligent driving behavior is a significant claim exposure—and, in turn, a major contributor to premium pricing decisions—there are benefits to motor vehicle service contract providers. In the personal and fleet automobile insurance space, telematics technology can be relayed to the insurer, and discounts or pricing variations can occur throughout the policy's term. For example, early versions of vehicle telematics for personal insurance revolved around pricing automobile insurance based on the amount of miles driven.

For motor vehicle service contracts where the contract essentially covers repair costs if the automobile has a mechanical failure, there are a myriad of similar benefits in using telematics. Monitoring driving behaviors, vehicle performance, component part maintenance needs, and other items can improve the predictability of failure and the extent of damage, which directly inform pricing decisions. Better data enables providers to more accurately price motor vehicle service contracts in relation to the ongoing risk they present.3

Claim Adjudication. The motor vehicle service contract industry pays out millions of dollars in annual claims, inclusive of related expenses. In addition to the costs providers incur, consumers are often inconvenienced when there is an automobile breakdown and subsequent claim, as they must wait on repair facilities to order parts, receive claim approval from the motor vehicle service contract provider, and juggle multiple work orders. In addition, the inconvenience to the consumer cannot be understated.

With telematics technology, there are three main claim adjudication benefits. First, remote adjudication and administration can occur. For example, after a breakdown, the telematics device may have recorded salient information about the automobile's performance prior to breakdown. This information will help for quick, efficient diagnostic analysis to pinpoint the failure. In turn, the remote adjuster can identify the problem and either call a tow truck to the consumer's location (if the vehicle is inoperable) or direct the consumer to the closest repair facility with the relevant part in stock. This remote adjudication process reduces expenses for the provider and may be safer and more expedient for the consumer.

Second, certain breakdowns might be preventable due to telematics technology. For example, if there is a maintenance concern or if a component part is not operating at optimal capacity, telematics technology could transmit such information to the provider or the consumer, alerting them of the condition. The provider could then direct the consumer to remediate the situation to avoid a costly, dangerous, and disruptive breakdown.

Third, telematics technology will help determine whether an event is excluded under the terms and conditions of the motor vehicle service contract. For example, street racing is often an excluded cause of loss. In the event of an engine failure, telematics technology can help identify whether aggressive acceleration and braking was occurring, which may reveal street racing behaviors and assist in quick resolution of a claim.

Obstacles with Vehicle Telematics Technology

Although there are many benefits to telematics, there are many obstacles to its broad acceptance in motor vehicle service contracts, including the following.4

  • Privacy. State and federal law is unsettled regarding this issue and could be the most challenging obstacle to widespread acceptance of the technology. The data being recorded often records the whereabouts of an individual, his or her driving behaviors, and potential illicit activities (e.g., speeding in a school zone). State and federal law is ongoing and rapidly changing, so motor vehicle service providers must constantly observe and understand the changing legal landscape.
  • Implementation Costs. Purchasing and installing telematics technology can be very expensive and has proven to be somewhat cost-prohibitive for the industry. As technology advances, costs may naturally come down.
  • Consumer Consent. To install telematics technology, consumers must regularly supply the service contract provider with consent. Consumers have been slow to embrace this technology in the personal automobile space, which has spilled over into the motor vehicle service contract industry.
  • Cyber-Security. Could the data be susceptible to cyber-security events, which could reveal sensitive, personally identifiable information? Where is this information housed? How is it protected? What if a breach of such data occurs? These are a few of the questions surrounding cyber-security.
  • Data Ownership. There is an ongoing discussion about who owns the data and how it can be used. For example, could information gathered from a provider be sold to manufacturers, vendors, and consumer groups? It is also unsettled as to what type of consent, if any, a provider would need from a consumer.

What's Next?

Telematics will continue to play an increasingly important role in the next few years for motor vehicle service contract providers. The benefits to providers are apparent, but consumers will have to embrace the benefits of the technology, and the legal landscape will have to settle. Regardless, the advantages of telematics technology is intriguing to the motor vehicle service contract industry and will play an important role in its future.

1Dimitris Karapiperis et al., National Association of Insurance Commissioners, Usage-Based Insurance and Vehicle Telematics: Insurance Maket and Regulatory Implications, March 2015, 4 & 21,

2Ibid., 3–4.

3Ibid., 43–46.

4Ibid., 52.

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