A few months ago, Saman Jayasekara was shopping online for cheaper car insurance when he came across a new product from Progressive Corp. that offered him the chance to save as much as 30%.
But there was a catch. He would have to install a device in his Hyundai Sonata that would monitor his driving habits, such as when he drove, miles driven and number of sudden stops. Progressive would analyze the data to determine whether he deserved a discount.
The New Jersey software programmer enrolled, and after a month he received a 23% discount, which could save him hundreds of dollars a year.
“Everybody is scared of being monitored,” Jayasekara said. “But I’m happy with my discount.”
Progressive was one of the first insurers to venture into what people in the industry call “usage-based” or “pay-as-you-drive” insurance. State Farm and Allstate Corp. have similar programs. Evaluating driving data is considered a more precise way to gauge risk, compared with traditional pricing methods that factor in things such as age, gender and marital status.
More accurate pricing has benefits for consumers and the insurance industry.
Proponents say usage-based insurance creates a fairer insurance system because generally, safer drivers and people who drive less have subsidized the costs for those who drive more or more recklessly. Progressive, widely considered the leader in usage-based insurance, said the average savings for drivers who have earned a discount is 10% to 15%. Not every motorist who elects to be monitored receives a discount, and rates will not go up based on performance, insurers say.
Insurers also predict that in-car monitoring will encourage safer driving or, at a minimum, reduced driving, which could lead to fewer crashes and insurance claims. Transportation officials and regulators are excited by the potential social benefits of usage-based insurance, such as reduced congestion and pollution emissions.
“As a matter of public policy, pay-as-you-drive programs make a lot of sense,” said Adam Cole, general counsel of the California Department of Insurance. “We want to create an incentive for insurance companies and consumers to participate in these programs.”
But there are trade-offs. Although the programs are voluntary, consumer and privacy advocates are concerned that insurance companies are becoming “Big Brother.” State Farm is stretching privacy boundaries further by including GPS in its recording device to track a vehicle’s location. The company said it is not using location data to calculate premiums but rather to offer roadside assistance and other services.
Usage-based insurance also affects the basic financial model of insurance: that for every discount there is a corresponding surcharge, because insurers have to collect enough in premiums to cover their potential exposure. If safe drivers start paying less, will high-risk drivers have to pay more?
“It’s clearly an outcome that could possibly occur, but we’re not ready to make that determination yet,” said Daniel Kraft, Allstate’s director of new product and service development.
The uncertainty plus the privacy concerns make some question whether usage-based insurance will become a mainstream success. Even some insurance companies say the product is not for everyone.
“We knew right out of the box that some consumers would not want it because they don’t want a box in their car gathering details on how they drive,” Kraft said.
To entice customers, Allstate and State Farm are offering a 10% discount for joining their monitoring programs. But the initial discounts are partially offset by one-time activation and technology fees.
The tracking devices tie in to a car’s diagnostic port, a computer, which rules out vehicles made before 1996 because they do not contain standardized diagnostic ports.
The devices track mileage, time of day, hard or extreme braking and speed. State Farm also collects data on left and right turns, all factors it says are related to accident risk. The more sudden stops, for example, the greater the chance to rear-end another vehicle.
Allstate defines a “hard” brake as slowing 8 to 10 mph over a 1-second interval, according to its regulatory filing. An “extreme” brake is slowing 10 or more mph over the same interval.
Regulators are not so sure that each variable is predictive of risk. California, for example, is limiting data collection to miles driven.
“What the data show is that the more you drive, the greater the chance for an accident,” Cole said. “These other driving factors may well make a lot of sense, but we felt we wanted to do this in an incremental fashion.”