Auto insurance telematics explained: How driving data improves pricing, claims, and customer engagement 

Key takeaways

Insurance telematics uses real driving data to improve pricing fairness and accuracy.
By incorporating actual driving behavior rather than relying only on proxies like age or credit, telematics enables more granular, behavior‑based risk segmentation and pricing.

Usage‑based insurance (UBI) is the primary business application of telematics.
UBI programs price policies based on how much, how safely, and when people drive, helping insurers improve retention, reduce claims, and better target valuable customers.

Telematics supports the full insurance lifecycle, not just underwriting.
Insurers use telematics across acquisition, quoting, engagement, and claims, enabling features like try‑before‑you‑buy programs, proactive FNOL, fraud validation, and ongoing customer interaction.

Multiple data‑collection models exist, each with tradeoffs.
Smartphone apps, OBD‑II devices, BLE tags, OEM/embedded vehicle data, and hardwired devices all collect telematics data, differing in cost, scalability, data quality, and operational complexity.

Trust, consent, and privacy are foundational to successful telematics programs.
Customer opt‑in, transparency, and strong data governance are essential, as positive consumer sentiment toward telematics is closely tied to how responsibly driving data is collected and used.

Introduction

Insurance telematics uses mobility data to improve how insurers price risk, manage claims, and engage drivers. In a crowded marketplace where insurers may struggle to retain customers, telematics offers a window into accurate pricing that will benefit both the insurer and the customer alike. 

Adopting a telematics program can not only improve underwriting profitability and increase claims processing efficiency, but usage-based pricing and value-added services can also improve customer satisfaction and position your business as innovative and high-tech.  

Read on for some key facts about telematics. 

What is insurance telematics? 

Telematics is the collection, transmission, and analysis of vehicle- or trip-level data collected from consumers who have opted-in to share it through their mobile devices, in-car devices, and/or connected-vehicle systems.   

Insurance telematics can be used for usage-based insurance (UBI) pricing and claims management.  

Insurers are investing more in telematics because it can support the entire lifecycle — from acquisition and quoting to claims handling and retention.

What is usage-based insurance (UBI)? 

UBI, powered by telematics, prices insurance policies based on drivers’ actual behaviors on the road. Among the key benefits are more accurate pricing, insights that help insurers to target their most valuable customers, higher retention rates, and fewer claims thanks to safer driving behavior.  

Why is telematics important for auto insurance? 

Traditional auto insurance underwriting typically relies on rating variables like age, gender, marital status, and credit scores — helpful, but indirect. Telematics improves the pricing process by adding actual driving behavior data to the mix of variables, enabling more accurate, granular, and timely segmentation.   

At the same time, insurers are investing more in telematics because it can support the entire lifecycle — from acquisition and quoting to claims handling and retention — especially as carriers increasingly shift to mobile-first engagement models. 

What type of driving data does telematics collect? 

Telematics signals can be grouped into five primary categories. 

Exposure data 

Exposure measures the amount of driving. It includes: 

• Trip count 
• Mileage 
• Trip duration  

Driving behavior 

What type of actions are drivers taking while driving? Telematics can measure such behavior as: 

• Hard braking 
• Rapid acceleration 
• Speeding patterns 
• Phone handling while driving 

Time‑of‑day and driving patterns 

When people drive — and the patterns that creates — are important measurements of risk.  

Distraction signals 

Phone movement and screen interactions can indicate distracted driving, one of the fastest‑growing risk factors. 

Crash and impact detection 

Certain telematics tools can detect collisions or high‑impact events and trigger alerts. 

How is telematics data collected? 

Telematics data can be collected through several channels, each with their own unique benefits and challenges.  

Smartphones 

What it is:

Sensors in the driver’s phone — accelerometer, gyroscope, GPS — detect trips and behaviors. 

Benefits: 

Smartphones are widely favored because of their cost-efficiency and easy deployment. From a go-to-market standpoint, smartphone-first programs support faster scaling and easier experimentation (including “try before you buy” programs), which is why many carriers have migrated from older hardware-heavy approaches. 

Challenges: 

Battery life, accurate trip detection, and distinguishing between driver vs. passenger are a few challenges with smartphone data collection.  

OBD‑II devices 

What it is:  

A plug‑in device connects to the vehicle’s diagnostic port and transmits data. 

Benefits: 

These devices are typically easy for consumers to self-install and can provide high-quality, reliable signals.  

Challenges: 

OBD-II devices introduce logistics costs and participation friction (shipping, returns, device management). 

Bluetooth (BLE) tags 

What it is:  

A small beacon is placed in the car and paired with a smartphone.  

Benefits: 

The BLE beacon helps smartphone programs detect when a trip starts and stops and reduces false trip capture (e.g., taking a taxi). It can also reduce battery drain by limiting always-on sensing.  

Challenges: 

The beacons can suffer from environmental and signal interference and range limitations. 

Original equipment manufacturers (OEMs) / embedded vehicle data 

What it is:  

Data is transmitted from connected-car devices installed directly by the automaker.  

Benefits: 

OEM telematics uses factory-installed connectivity and sensors. Adoption is growing as vehicles ship connected by default and data access frameworks mature.  

Challenges: 

Embedded vehicle data introduces ecosystem complexity: permissions, standardization, data rights, and vendor integrations. 

Hardwired black boxes  

What it is:  

These are aftermarket installed devices that are permanently fitted in the vehicle. 

Benefits: 

Hardwired devices support robust data capture and are historically strong for crash reconstruction, theft/fraud mitigation, and claims workflows 

Challenges: 

Black boxes can be higher cost and require installation.  

What are the benefits of using telematics? 

Telematics data can support: 

• More precise pricing (enabling usage-based insurance, or UBI) 
• Better underwriting selection 
• Crash detection and first notice of loss (FNOL) automation 
• Customer engagement and retention 
• Fraud detection and claims validation 
• Improved road safety thanks to fewer accidents  

Deploying telematics in the claims process can generate immediate operational ROI. 

What are the most common UBI models? 

Usage‑based insurance (UBI) comes in several forms depending on the business objective. 

PAYD (Pay‑as‑you‑drive) 

PAYD premiums are influenced by how much someone drives. They are ideal for low‑mileage segments or drivers who increasingly expect cost to reflect usage. 

• Inputs: Mileage, trip count, trip duration 
• Benefits: Fairness, easy to explain, useful in digital‑first quoting 

PHYD (Pay‑how‑you‑drive) 

PHYD premiums are influenced by how safely someone drives. 

• Inputs: Braking, acceleration, speeding, cornering, distraction, timing, location, road types 
• Benefits: Best for programs seeking segmentation lift and risk-based pricing 

MHYD (Manage‑how‑you‑drive) 

MHYD programs add coaching and feedback loops to actively shape driver behavior. 

• Inputs: All PHYD signals plus app feedback and tips 
• Benefits: Offers personalized feedback tools and behavioral nudges, often paired with gamification or incentives 

TBYB (Try-before-you-buy) 

TBYB allows customers (and insurers) to preview a telematics-based policy before fully committing to it.  

• Inputs: Similar to PAYD and PHYD programs 
• Benefits: Scaled-back technology for easier implementation and lower start-up cost, gives insight to both the potential customer and the insurer before locking in a policy price 

How does telematics support crash detection and claims automation? 

Deploying telematics in the claims process can generate immediate operational ROI. 

Crash detection 

Identifying collision‑level impacts using mobile sensors can trigger appropriate workflows — dispatching help, alerting loved ones, and/or initiating claims. 

Proactive FNOL 

Telematics enables proactive First Notice of Loss (FNOL), providing insurers with: 

• Instant awareness when an incident occurs 
• Early touchpoints with the customer 
• Improved claims triage 
• Reduced cycle times 
• Better accuracy in incident documentation 

Fraud reduction 

Claims‑focused telematics can support fraud mitigation and verification.  For example, crash event signatures can validate reported accidents, protecting insurers from staged or misrepresented events and improving claims integrity. 

How do insurers use telematics across the policy lifecycle? 

Telematics is not just a pricing tool — it supports multiple parts of the insurance lifecycle when deployed strategically. 

Pricing and underwriting 

Telematics helps insurers: 

• Identify low‑risk drivers more accurately 
• Price high‑risk drivers based on actual behavior 
• Reduce adverse selection 
• Improve overall loss ratio 

Customer acquisition 

Telematics allows insurers to: 

• Offer “try-before-you-buy” scoring 
• Present more transparent, behavior-based pricing 
• Attract good drivers with more competitive rates 

Customer engagement and retention 

Apps that offer driving feedback or rewards create ongoing interaction between insurer and policyholder. Insurers increasingly use gamification and behavior feedback to keep drivers engaged. 

A telematics program also enables value-added features that allow an insurance company to diversify its offerings. For example: 

• Vehicle location: Help customers find their car more easily, such as in a large parking lot 
• Stolen vehicle tracking: Detect vehicle theft and enable retrieval in collaboration with law enforcement and insurance personnel 
• Remote diagnostics: Identify vehicle problems and assist in resolution 
• Roadside assistance: Telematics can facilitate service requests in case of breakdowns or other issues 

Claims efficiency 

Telematics can enable: 

• Faster FNOL 
• Better triage 
• Improved repair routing 
• Reduction in fraudulent claims 

Telematics creates value when insights flow into underwriting, pricing, claims, and customer experience layers, not when they remain siloed in a dashboard. 

Is insurance telematics appropriate for fleet management? 

Insurance telematics, while more broadly associated with personal policies, is also effective for commercial lines and is a major growth opportunity. Traditional fleets typically already have on-board devices and run telematics for operations; adding insurance-grade scoring and claims workflows can reduce losses and total cost of risk.   

How to operationalize telematics in your business 

Step 1: Align telematics to business outcomes 

Decide whether your first milestone is pricing sophistication, claims automation (FNOL), engagement, or a combined strategy. The form factor and experience design will follow that goal.  

Step 2: Choose the right data capture model 

Use smartphone-first for speed and scale, tags to improve attribution, devices where needed for crash/claims robustness, and OEM data where access and permissions are viable.  

Step 3: Build data governance on day one 

Take a privacy-by-design approach and develop transparent customer communications and consent structures.  

Step 4: Integrate into core systems 

Telematics creates value when insights flow into underwriting, pricing, claims, and customer experience layers, not when they remain siloed in a dashboard. 

Privacy, consent, and data governance come first 

Today’s customers hold an increasingly positive impression of telematics, with 82% of policyholders recommending the use of a telematics app. That percentage increases to 90% for drivers under the age of 53.  

Trust is the key to this increase in positive sentiment: Customer consent and control, transparency, and stringent policies around privacy and data management are key features of telematics programs. For example, Arity’s Privacy Center outlines the foundational principles that support our collection, management, and use of customer data.  

How Arity can help your organization to deploy a telematics program  

Arity can equip insurers and mobility partners with data, analytics, and platform capabilities for pricing, claims, and engagement. 

Driving data at time of quote  

Arity IQ℠ enables insurers to access driving behavior insights on tens of millions of drivers at point of quote, improving pricing precision without requiring policyholders to complete evaluation periods. Arity IQ can help auto insurers: 

• Enhance risk awareness  
• Reduce adverse selection 
• Improve retention by pricing more accurately from day one 

Telematics‑based scoring for insurance pricing and customer retention 

Drivesight® combines driving behavior with claims-based predictive modeling to produce an insurance-grade telematics score. Drivesight can: 

• Provide strong predictive lift vs. traditional rating factors 
• Help segment high‑risk and low‑risk drivers more accurately 
• Support both pricing and retention goals 

Territorial ratemaking 

Geosight delivers regularly updated, aggregated, and anonymized driving behavior data at the ZIP-code level, derived from 15% of the U.S. driving population — so that you can rate territory with more precision, speed, and confidence. [Read a case study on the benefits of Geosight.] 

Crash detection: Near real-time claims activation 

Crash Detection helps both insurers and mobile apps deliver safer and more supportive customer experiences by detecting accidents and triggering workflows such as:  

• Alerts 
• Assistance dispatch 
• FNOL initiation 
• Claims routing