Telematics Explained: What It Is, And How It's Changing Home Insurance

Telematics already is making inroads into auto insurance, and it could be coming soon to a home near you – even yours. What's telematics? It's the use of wireless equipment to transmit information over long distances. Doesn't affect you, right? Maybe not now, but it could affect you soon as more insurance providers encourage it.

By 2020, about 36% of auto insurance providers are expected to use telematics devices, according to a study by the National Association of Insurance Commissioners. It says about 8.5% of consumers have policies that incorporate them. The use of telematics in home insurance isn't as far along, but four major homeowners coverage providers have begun to use them.

How it works in auto insurance

For auto insurance, providers send policyholders devices that can be plugged into their vehicles. In exchange, most carriers offer a participation discount – the amount can vary by state.

The device can measure several factors, including the number of miles you drive; the time and day that you drive, especially during higher risk hours; your instances of 'hard' braking – decreases in speed of 7 mph per second or more; rapid acceleration; hard cornering; and air bag deployment. It sends that information wirelessly to your provider. After a certain period of tracking, your provider can adjust your premiums based on these assessments.

For example, Progressive is one of the pioneers in auto insurance telematics with its Snapshot device. In Ohio, it measures hard braking, mileage and time and day. You could receive up to a 20% discount depending on how safely you drive. Conversely, you could face up to a 10% increase in your premium in Ohio if your driving is too risky.

Progressive says most policyholders earn discounts from Snapshot. Allstate, another provider that offers telematics, says it does not increase premiums based on the information it gathers.

How it's coming to home insurance

Within the past 12 months, some leading home insurers – including Liberty Mutual and State Farm – have reached agreements with companies that make or provide 'smart' home products such as programmable and remotely controlled thermostats, outlet controls, connected entertainment systems, sensors that monitor carbon monoxide, cold, moisture and smoke, security systems and even automated door locks.

Again, providers offer discounts to policyholders who sign up for the devices, which can provide large amounts of information – energy use, average temperatures and humidity levels, for example – to the insurance company.

Verisk, which specializes in insurance analytics, predicts that 12% of total households will have at least one home system connected to the Internet by 2019.

Why do these devices matter to providers? Because they can help prevent or mitigate claims that cost carriers lots of money. Consider fire, for example. The average homeowners insurance fire claim exceeds $37,000. If smoke sensors can accelerate notifying fire departments of a potential blaze and lead to home fires being doused quicker, the savings for insurance companies can be substantial.

Similarly, cold sensors and thermostats that can be remotely operated can help prevent pipes from bursting – claims for those average nearly $7,500. Security systems can reduce theft claims – the average there is more than $3,600. Again, eliminating some of these claims is beneficial to homeowners and insurance providers.

Aside from that, carriers can use information from the devices to refine their risk assessments further, which could at some point reduce dependence on such rating factors as credit.

The questions about telematics

When it comes to telematics, the elephant in the room – or car, as it may be – is privacy. Many motorists, despite assurances from insurance carriers that the information provided won't be given to third parties, don't necessarily want their behavior tracked.

That likely also could become a factor for home insurers – security systems, for example, often include cameras in various locations. Few homeowners probably would be comfortable with their insurance providers having access to that.

Another concern with telematics is hacking. Drivers and homeowners alike worry that confidential records could be open for cyber crooks. The more extreme worries involve losing control of vehicles or home features.

How valid are these concerns? The answer almost doesn't matter – even irrational fears could stunt the spread of telematics.

The lure of potential savings likely is enough to continue to attract policyholders to telematics, particularly as early adopters spread positive experiences to friends, family members and colleagues. Given how privacy concerns ebb and flow about social media, GPS systems and other opportunities for sharing information, the questions aren't likely to end soon. But they also probably aren't likely to present major hurdles.

Arthur Murray writes for and, an online resource for homeowners and drivers across the country. Offering comparative automobile and home insurance quotes, consumers rely on for the most competitive rates from the top-rated insurance carriers in the country. The blog provides fresh tips and advice on a range of financial topics to help homeowners and homebuyers make educated decisions about their insurance purchases.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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