‘The one thing that unites all human beings, regardless of age, gender, religion, economic status or ethnic background, is that, deep down inside, we ALL believe that we are above average drivers’ (http://www.enginesofmischief.com/makers/evan/sigs/barry.html). This is particularly true for young drivers. Judging by their continuous cognitive, emotional, social and biological growth, young drivers are more prone to engage in impulsive behaviours which often can be unsafe. This is because young drivers lack adequate practical experience in driving which in turn contributes to their inability to steadily identify the conditions that are risky when driving. For instance, they tend to drive more commonly during night times and with…show more content… As such, all customers will be priced the same leaving low-risk applicants at a disadvantage (the role of risk class). Consequently, It is important to note the recent ruling of the European Court of Justice banning companies from setting insurance premiums based on gender (confused.com). This results in female drivers having to pay the same price as male drivers who are in nature more risky. Telematics limits this phenomenon as it differentiates the risk behaviours of every applicant and prices each accordingly.
Furthermore, it reduces moral hazard. Individuals will have an incentive to mitigate risky behaviours as they bear the cost of their actions. This in turn can have positive effects on the social welfare of the economy and reduce negative externalities on third parties (role of risk class).
Nonetheless, there are several disadvantages associated with adopting a telematics-based insurance policy. One is the privacy concern amongst drivers who are hesitant to share information about their driving behaviours such as their speed and braking, and their locations. Therefore, customers must be clear about what they agree upon in their insurance policy. In addition, those who drive often and especially during rush hours have nothing to gain from having a telematics box as it will only give rise to their insurance premiums. Finally, individuals