Your next car will spy on you and report your driving style to your insurance company. It'll keep track of any risky maneuvers you perform and tell the police if it thinks you're to blame for an accident. And how? It's all about digital telematics.

Telematics is a method of monitoring a vehicle. By combining a GPS system with on-board diagnostics it's possible to record – and map – exactly where a car is and how fast it's traveling, and cross reference that with how a car is behaving internally.

Add communication over a 3G network and telematics can be used to send both data and communications back and forth between a vehicle and a central management system. Using sensors in cars and a trackside wireless network, Formula One teams have been using telematics for years for tell exactly where opponents are on the racetrack.

At the fringes telematics is also a term used to describe 'connected car' features in general, which include live weather, traffic and parking info on the dashboard, apps, voice-activated features (such as featured on the Parrot Asteroid car receiver) and even – gulp – Facebook integration.

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Who will use telematics?

All of us. The tech can be used for monitoring complete fleets of vehicles (everything from courier companies to emergency services) and even for tracking stolen cars. Increasingly it's going to be found integrated into 'connected' cars – think a situation where your cars breaks-down, and the AA is automatically alerted and sent data on your car's diagnostics – though the first wave will likely be car insurance firms desperate to offer 'usage based insurance' policies.

Why now?

Technology is changing – and so is the law. The European Court of Justice has ruled that from the end of 2012 car insurance premiums must be gender neutral (bye bye Sheila's Wheels), so car insurers have to find another way of assessing risk. What better way than using accurate data on how we, as individuals, actually drive? That said, the totally open, transparent approach that telematics brings might be too much of a leap for some insurers nervous of sharing personal data.

This is 'pay as you drive', right?

Wrong. Although the use of telematics is, ahem, accelerating, it's also undergoing a change from being focused on pay as you drive (PAYD) to pay how you drive (PHYD).

"We basically monitor and assess the driving behaviour of the vehicle user via on-board technology which enables us to provide a much more accurate rate, and a very specific understanding of risk," says Johan van der Merwe, MD of pay-as-you-drive car insurer Coverbox, which also offers free theft tracking.

"The amount of information we gather from devices installed in customers' vehicles – time and location of journeys, driver behaviour during those journeys, and so on – means that we are in a position to develop much more bespoke insurance products, personalised to specific drivers."

Telematics also means that well-behaved drivers can be rewarded with lower fees.

"We all know young drivers who are maniacs behind the wheel, but we also all know young drivers who are incredibly safe and sensible behind the wheel," says van der Merwe. "The current insurance market lumps them all together as being equally high liability. We can change that."

The more detailed the information collected, the closer the insurance industry can get to accurately apportioning blame to specific drivers involved in an accident.

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Will telematics tech mean lower car insurance premiums?

If you're a good driver, almost definitely. The pricing model used by car insurers will suddenly become 'de-averaged', with the new model based – in theory – purely on rates on driving style and location rather than lifestyle and home address. In short, it's fairer. As well and reduced insurance claims for drivers that take less risks, such systems can also provide feedback on a driver's performance, meaning fewer crashes and incidents, and therefore fewer insurance claims. It's also possible to tailor feedback to maximize fuel economy.

How will different driver's behaviour be compared?

Some insurers are using the data collected using telematics to compare with advanced drivers. One insurance telematics specialist, MyDrive, compares its second-by-second driver data to a fleet of Royal Society for the Prevention of Accidents (RoSPA)-qualified advanced drivers. The theory is that this provides a robust, credible and objective benchmark, and the closer you get, the lower the premium.

What kind of feedback will drivers get?

Though it started by merely tracking the location of long-distance lorries and sending that information back to HQ, telematics is increasingly cloud-based, sharing not just data, but insight about driver behaviour and risk.

"The information being shared can be as little as a single red light LED warning indicating to a van driver that they have performed a high-risk manoeuvre," says Tanya Roberts, vice president of marketing at GreenRoad, a cloud service used by the likes of First Group and Stagecoach for their fleets of vehicles.

"Or it can be detailed analysis that shows a fleet manager where vehicles are on their routes; where a driver is consistently breaking the speed limit; or a black spot where a number of vehicles have had incidents."

Expect annoying messages from your next sat nav like 'slow down' or 'stop texting, you idiot!'.

What about the hardware?

It's all going to work via smartphone apps, and though the likes of Mercedes-Benz's mbrace has some handy features, we're actually talking about something a little more serious.

MyDrive is providing an app to Autoline for young drivers in Northern Ireland.

"The app is activated each time the smartphone is plugged into the vehicle's power source and will begin to record data on a second by second basis once the driver travels at over 10mph for longer than 10 seconds," says Linden Holliday, CEO at MyDrive Solutions.

The app also records data about an individual's driving style, including a driver's level of aggression, smoothness, anticipation and consistency, which is qualified by information about road types – motorway, A-road, etc – and driving conditions (heavy rain, congestions).

Some believe that the word 'telematics' is going out of favour as it's associated with older technologies – cloud computing and smartphone apps is where telematics is headed.

Can anything stop telematics?

Although things are changing fast, there is a brake on progress that could slow things down; proprietary systems dominate, and can't integrate with eachother. Expect scalable open platforms to follow once smartphones and tablets become the dominant way to interact with telematics. Global software will likely bring the price down, too.

How quickly will telematics catch-on in the UK?

According to ABI Research it's in the UK and Italy that insurers will be quickest to adopt this technology, predicting that the number of insurance telematics users in Europe will grow from 1.5 million in 2010 to 44 million in 2017.