Your car knows everything
Insurance companies want to install electronic tracking devices in your car to monitor your driving. Safe drivers could earn substantial discounts, but is the loss of privacy worth it?
Saman Jayasekara (Jeff Zelevansky/For the Tribune)
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.
Jayasekara, a software programmer in New Jersey, enrolled, and after a month he received a 23 percent 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. Now, State Farm has begun offering an in-car monitoring system in Illinois, eight months after Allstate Corp. launched a program in the state. Evaluating actual driving data is considered a more precise way to gauge risk compared with traditional pricing methods that factored in, for example, 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 percent. 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. That has transportation officials and regulators 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 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 possible 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.
Kraft described the target customer for its Drive Wise program, which can provide savings of up to 30 percent, as someone who lives in an urban area, takes public transportation to work and drives a few thousand miles a year.
That would probably rule out a motorist with a safe driving record who commutes to downtown from Naperville every day, because of the number of miles driven every year, Kraft said.
"I think what we want to do is make sure people enrolling can really benefit from the program," Kraft said.
In a sign of how small the market for usage-based insurance could be, Allstate told the Illinois Department of Insurance in a regulatory filing in December that it expected only 6 percent of its customers in the state would enroll in the program.
Kraft declined to say how many Illinois motorists have enrolled in Drive Wise, except to say that Allstate is pleased with the response. Based on premiums written in 2010, Northbrook-based Allstate had about 9 percent of the Illinois passenger car insurance market, or about 761,000 vehicles, according to the company and the Insurance Department.
Bloomington, Ill.-based State Farm, the largest insurer in the state with about 30 percent of the market, took a different marketing approach to usage-based insurance. The company is selling its electronic tracking device more as a roadside assistance program that can summon a tow truck, alert police and locate a stolen vehicle. Customers who purchase In-Drive also can opt in to its usage-based insurance program, known as Drive Safe & Save. The insurer is offering discounts on premiums of as much as 50 percent.
To entice customers, Allstate and State Farm are offering a 10 percent discount for joining their monitoring programs. But the initial discounts are partially offset by one-time activation and technology fees. State Farm also is charging In-Drive customers between $5 and $15 a month, depending on the level of roadside assistance purchased.
The tracking devices tie into a car's diagnostic port, or 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, for instance, defines a "hard" brake as slowing down between 8 and 10 miles per hour over a 1 second interval, according to its regulatory filing. An "extreme" brake is slowing down 10 or more miles per hour 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."
Illinois and other states are letting insurers collect more data.
"In Illinois, you can collect about anything you want," said Jim Stephens, the state's deputy director of the property and casualty compliance unit.
Premium discounts are not based on any specific number of miles or instances of hard braking or driving late at night, insurers said. The premium will be based on a mix of all the factors.
But it isn't easy for consumers to figure out the exact recipe, even though they know the ingredients. Allstate's and State Farm's usage-based premiums are determined by complicated algorithms that were difficult for even regulators to figure out, Stephens said.
"We don't have a problem with these programs, but we're looking for transparency," Stephens said.
Kraft, of Allstate, said customers don't seem overly concerned about how the company uses the data to calculate a proprietary driving score.
"Customers don't care about the driving score; they care about the discount," he said.
Illinois' requirement that rate-setting formulas be public has kept Progressive out of the state with its usage-based program, Snapshot. Progressive says its algorithm for calculating premiums based on driving data is a trade secret. It has been researching and testing usage-based insurance for 15 years, longer than any other insurer, and has continually refined its algorithm based on 2 billion miles of driving data, the company says.
"We just don't want to put our algorithm out there for any competitor to see," said Richard Hutchinson, Progressive's general manger for usage-based insurance, who added that Snapshot is available in 39 states.
Jayasekara, who enrolled in Snapshot in June, said one of the cool features of Progressive's program is that he can review his driving patterns through a secure Web site, feedback that Allstate and State Farm also provide. For example, he can see how many "hard" brakes he had in a week.
"It's sort of become a game for me," said Jayasekara, who is 34 years old and married. "If there is a red light or a stop sign, I try to stop slower."
That is exactly the kind of behavior insurers want to encourage by tracking driver data. But Jayasekara remains concerned that his data could be shared with police if he gets into an accident.
State Farm and Allstate acknowledge that they would comply with court orders to turn over data to attorneys or law enforcement authorities.
Surveillance fears contributed to a British-based insurer scrapping its usage-based policies in England in 2008, less than two years after its launch.
Proponents of pay-as-you-drive insurance say privacy fears are overblown at a time when cellular phones are equipped with GPS. And, as Jayasekara demonstrated, any privacy concerns might be outweighed by premium savings.
"If the price reductions are substantial enough, I think that will affect behavior," said Cole, of California's insurance department. "People are cash-strapped."