Is it black or is it white?
In science and engineering, a black box is a device, system or object which can be viewed solely in terms of its input, output and transfer characteristics without any knowledge of its internal workings. The opposite of a black box is a system where the inner components or logic are available for inspection, which is sometimes known as a white box.
Given the recent hype around telematics - often called the "black box insurance solution" - and its potential role in the future of the motor insurance sector, I cannot help thinking that the industry is looking at the issue through the wrong end of the telescope. Telematics will, without doubt, have a major part to play in the motor market in the next 5-10 years and may even reshape the future of how such risks are assessed and premiums are calculated.
The current motor insurance model for the UK is broken and urgently needs fixing. The market cannot continue to operate at a combined ratio in excess of 100% - especially with little or no investment income offset. The dramatic rise in UK motor premium levels over the past 2 years is a move in the right direction but this move is reflective of a market playing "catch up". Premium levels are still running behind claims inflation, the aggregator models have reduced the motor insurance product to a overly simplified pricing exercise - where cheapest is not always best and over reliance by the industry to ancillary income and cash flow underwriting has all served to destroy the core principals the industry was founded on. Solvency 2 is all about risk-based capital adequacy, so what better way to assess motor risks in the future then linking the pricing of such risk to the driving habits of the individual(s) behind the wheel.
It is clear that the insurance industry has failed to self-regulate the pricing of the traditional motor insurance product - allowing as it does the constant increasing/decreasing pricing cycles and over emphasis on marketshare (at any price) to dictate policy. Opponents of the telematic solution point to privacy issues but this misses the point. In an age of global social media, where peoples of all ages live out their lives on the Internet, privacy (or the lack of it) is not a concern of the Facebook generation and if technology can help to distinguish good risks from bad and price them accordingly, while at the same time helping to counter the rise in fraudulent claims, is that not a good thing for the industry and for society as a whole?
Given the transparency the telematic solution can bring to premium pricing and the education of policyholders to the link between pricing and risk, is it not more of a white box solution? Wouldn't it be nice to see the UK government sponsoring an initiative to mandate the installation (by all manufactures) of these "white boxes" into all new cars and to subsidise the retro-fitting of existing cars? It's not often a game-changer is seen in the insurance industry but maybe the "white box" is just such an event.