Auto Insurance

Insurers Are Collecting More Information Than Ever Before. Is It Worth the Trade-Off?

Car insurance companies are using smartphones and always-on trackers to set insurance rates. Should you sign up, or do the risks outweigh the benefits?

Insurance companies have long attempted to create detailed profiles about their customers to set more accurate car insurance rates. Insurers now ask potential customers dozens of questions about where they've lived, what they do for a living and more during the process of getting a quote. When setting rates, they also check your credit (depending on the laws in your state), ask about household members and inquire about recent address changes.

Most recently, many insurers have begun using smartphones to monitor your driving habits. By installing an insurer's app, you'll share where and when you drive, how smoothly you speed up and slow down, and whether you use your phone while driving. Insurers gather this extra information with the goal of setting car insurance rates more accurately. Low-risk drivers are incentivized to join these programs, as their good habits typically result in a lower insurance bill.

The question drivers have to ask: How much information should you share with your insurance company in hopes of getting lower rates? Is it worth the loss of your privacy?

Have Auto Insurance Rates Gone Down?

The short answer is "maybe," as dozens of factors contribute to rates nationwide. But even as insurers use telematics more and more, insurance rates increased steadily by 2% to 5% each year between 2012 and 2016.

But what about the best drivers, who should be seeing the lowest rates? I spoke to Dan Manges, the co-founder and CTO of Root Insurance about how it uses higher-quality data to set more accurate rates for drivers. Root requires drivers to take an app-based driving test before it offers a quote, and it only offers insurance to those who prove they're safe drivers. Root's driving test runs for about two weeks and tracks the time of day you use your car, how abruptly you stop or start your vehicle, and whether you pick up your phone while driving. As a result, Root says drivers who have switched from other insurers have saved an average of $1,187 per year.

Root isn't alone: Many popular insurance companies also offer discounts for good drivers. Progressive's Snapshot program offers safe drivers up to 30% off their normal rate after a 30-day testing period. Allstate's Drivewise offers even more savings—qualified drivers get 10% off their rates the minute they sign up and save up to 32% total once they've proven their driving abilities. Some telematics tools provide other benefits, like an alert for when your car has a mechanical problem.

It's less common, but some insurance companies, like MetroMile, are also using telematics to offer usage-based insurance. For usage-based insurance (UBI), drivers pay a combination of a monthly and per-mile rate, so people who drive less get to pay less. However, UBI rates are typically only cost-effective for drivers who travel much less than the national average of 12,000 miles per year.

The Trade-Offs of Sharing Private Information

Regardless of how much money you save on your insurance bill, there are trade-offs to sharing more information with insurance companies. For starters, security breaches at different institutions—such as retailers, hotels, financial services and social networks—mean your data could be at risk. Giving your most private, detailed information to your car insurance company—not just where you live and work, but essentially where you are at all times—is just one more way of becoming vulnerable.

Additionally, drivers may be concerned about insurance companies using data that doesn't accurately reflect your risk as a driver, in order to set rates. For example, many insurance companies use your credit history when setting rates, meaning people with low credit scores may have more expensive insurance bills. Insurance companies argue that this is a stastically valid piece of information. But if you were laid off last year and missed a few credit card payments as a result, you might get hit with higher insurance rates—through no fault of your own, and without anything to do with whether you are likely to cause an accident.

Root has deviated from the typical car insurance rate algorithm and emphasizes your abilities behind the wheel above other criteria. While Root still considers many aspects of your overall personal history, the company's biggest determining factor for setting rates is how you fare on its driving test. And it's working to eliminate aspects it sees as nonessential. "We have already removed education and occupation from our pricing models and plan to remove even more demographic variables over time," Manges told me.

Ultimately, what types of data drivers are willing to share for potentially lower rates is a personal decision drivers have to make for themselves. If you use smartphone apps that track your phone's location, you're already sharing much of this information with other companies. But for privacy-minded individuals, sharing more of your personal data may not be worth the perks.

Matt Timmons

Matt is a Technical Writer at ValuePenguin, focusing on insurance. He previously created educational content at Grovo Learning and MarketSmiths Content Strategists.

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.