Gizmo May Cut Premiums for Careful Drivers
Gene Mahoney considers daredevil drivers a major culprit in the high cost of auto insurance, and he doesn’t want to pay for their recklessness. So he recently agreed to install a feature in his 1997 Isuzu Rodeo that he hopes will cut his premiums: an electronic monitor to record how far and fast he drives.
In six months, he’ll transfer the monitor’s data to his home computer and send it electronically to his auto insurer, Progressive Corp. Once he does, the company will provide an immediate $50 break on his semiannual premium. The monitor eventually may earn Mahoney other discounts too.
“I don’t know if they can detect the people who weave across lanes,” said Mahoney, 49, of Los Angeles. “But I only work two miles from where I live, and I don’t drive like a lunatic. This can only help me.”
Mahoney is participating in a voluntary test to determine whether factors such as start-and-stop driving and speed can predict the rate of insurance claims more accurately than more standard measures, such as a driver’s history of tickets and accidents. Over the next year, Progressive, based in Mayfield Village, Ohio, hopes to gather enough data to revamp how it sets auto insurance rates, giving discounts to drivers with low-risk habits and boosting costs for those most likely to cause a loss.
“Why should a person who is more likely to be in an accident pay the same rate as the person who is less likely to be in an accident?” asked Dave Huber, manager of Progressive’s TripSense division, which is providing 15,000 policyholders with monitors and examining the collected data. “Does your chance of loss differ based on whether you take one 50-mile trip or 10 five-mile trips? That’s the kind of thing we hope to figure out.”
The program is indicative of an industry trend toward “granular” underwriting, which aims to put customers in narrower risk categories, said Keith Toney, president of InsurQuote, an Atlanta-based company that culls consumer data to help insurers price their products. That can be both an opportunity and a risk for consumers, who may soon learn that such things as their level of education, their chosen profession and, in some states, their credit score will eventually be factored into their insurance rates.
Insurers have always set premiums based on their identification of high-risk and low-risk drivers. Young drivers are higher risks than older drivers, single people more risky than married, and drivers of sports cars more likely to crash than drivers of compacts. Where the consumer lives and how many miles he or she drives each year are also factored into the complicated formula that determines insurance premiums.
But until recently risk pools were defined broadly. Just three age groupings were used -- 21 and under, 22 to 50 and 50 and over. Now insurers are looking at whether 25-year-olds should be separated from 30-year-olds and whether it matters that the sports car is driven by a high school graduate rather than someone with an advanced degree.
“Insurance was based on the law of large numbers. You get a big group of people together and the overall behavior becomes predictable,” Toney said. “But the industry is pushing toward more and more precise pricing.”
Progressive’s program is a good example. Traditionally, insurers have asked their customers how many miles they drove each year and have relied largely on the accuracy of the consumer’s assessment to set rates. Progressive’s program would set rates on real data rather than recollection.
The Lego-brick-size monitors that Mahoney and others are plugging into their cars will record the number of times the car is started, how far it is driven, driving speeds and the times of day that the car is in use. Based on that data, the insurer will be able to get a picture of how the car is driven and learn whether that way of driving affects accident rates. Huber said the company expected to tell policyholders immediately whether the information in their monitor would earn them a discount -- or a rate hike -- and why.
Most states impose rules on the ways rates are set. In California, for example, insurers are required to use the applicants’ driving records and years of driving experience as primary factors when setting rates. And California insurers are barred from setting rates based on a driver’s credit score.
In other states, the factors may be different. But generally, regulators allow insurers to set rates using almost any criteria that they can prove have a significant correlation with the risk of loss.
For hundreds of years, insurance actuaries have pored over statistics aimed at setting rates to reflect risks. But insurers simply didn’t have the computing power to cheaply and effectively process billions of bits of data. What makes today’s rate setting more precise is technology, said Bob Hartwig, chief economist at the Insurance Information Institute in New York.
Companies have the ability to transmit vast quantities of information over high-speed Internet lines, making possible experiments like Progressive’s, which is collecting data on about 5.5 million days of driving and potentially billions of pieces of data.
Toney said that when he was a young actuary in the early ‘90s, “we still had to provide the books to the old-school agents so they could calculate rates with a pen and paper. Now we can run these very large statistical sets where you can see patterns in data that you would never see with the eye.”
For the consumer, the moral of this story is to drive as if people are watching, because they probably are, or will be soon.
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Kathy M. Kristof welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For previous columns, visit latimes.com/kristof.
