Usage-Based Auto Insurance: Savings vs. Privacy Considerations

Usage-Based Auto Insurance: Savings vs. Privacy Considerations

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Looking for a surefire way to save money on your auto insurance premiums? If you’re willing to have your driving habits monitored and evaluated, you can reap significant savings with usage-based insurance (UBI), also known as pay-as-you-drive and pay-as-you-go insurance.


How usage-based auto insurance works

UBI usually requires placing a small telemetry device (provided free of charge by the insurer) in your vehicle, connected to the car’s on-board diagnostics port. This device captures data from a number of vehicle sensors as well as via GPS. Alternatively, some carriers gather this information using a smartphone app they provide or through factory-installed equipment that’s already present in some newer vehicles.

Driving data that is often captured and scrutinized include the rates of acceleration, deceleration and lateral acceleration (while turning), the speed, times and miles the vehicle is driven, and sometimes the locations where you've driven. Drivers with safer and more preferable habits are eligible to earn a premium discount, possibly as much as 30% or more, depending on the carrier. Leadfoot, tailgating, long-distance and less careful drivers are not penalized but likely won’t qualify for UBI savings.

A win-win strategy

UBI is enticing to consumers because it provides more control over the amount of premium they pay. It is attractive to insurers, meanwhile, because it allows them to improve their measurement of risk.

"This means that the premium we charge each customer is more closely aligned with the risk that is being passed along to us," says Dick Luedke, company spokesperson with State Farm Insurance, which, along with Progressive, Allstate, Travelers, Liberty Mutual/Safeco and other insurers, offers UBI coverage.

Alex Brisbourne, CEO of KORE, a company that maintains the specialized wireless networks connected to the telemetry devices, agrees. "Insurers can get a pretty clear picture of whether a driver carries more or less risk toward an eventual claim," says Brisbourne.

According to a survey by Progressive, nearly 80% of consumers believe that usage-based insurance is a fairer way to price insurance and 90% of 18- to 34-year-olds are willing to try UBI.

"Traditional insurance isn't fair to low-mileage drivers. In fact, 64% of drivers pay higher premiums to subsidize the highest mileage-driving minority. The number one risk indicator for insurance is how often you're on the road, so if you drive less, you really should pay less for insurance," says Dan Preston, CEO of Metromile, a pay-per-mile auto insurance provider based in San Francisco, California.

Drivers who can benefit the most from UBI

As with traditional insurance, drivers need to consider their driving records, deals they may be getting from bundling their policies and the number of miles they are driving before signing up for UBI. Virtually any driver is eligible to enroll in a UBI plan, but those who meet the following criteria stand to benefit the most:

  • Drivers who use their vehicles infrequently, including retirees and those who work from home or have shorter work commutes
  • Drivers who do not have a history of moving violations, accidents or reckless driving
  • Drivers who don’t mind and won’t be distracted by the fact that they are being monitored

ValuePenguin 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.

On the other hand, higher-risk and younger drivers who qualify may also benefit from UBI because they’ll have an incentive to change their driving habits for the better, especially knowing that they’re being evaluated.

"Obviously, an aggressive driver need not apply," says Kristofer R. Kirchen, president of Advanced Insurance Managers, LLC. "People who drive late at night might want to pass as there are more impaired drivers on the road. Rush hour may also be a bad time to drive due to the amount of traffic. And drivers who travel above-average miles will also be hamstrung."

Additionally, consider that, while smooth, cautious and intelligent drivers are more appropriately rewarded for their conscientious driving habits, even the safest motorist probably does not drive as carefully as he or she thinks they do—at least in the eyes of insurers.

Consequently, adds Brisbourne, "pay-as-you-drive subscribers run the risk of exposing a gulf between the perception they have of their own 'safe' driving habits, and empirical safe driving habits as defined by insurers and their actuaries."

Confidentially speaking: privacy concerns

Critics of UBI caution that the information gathered by insurers can possibly come back to haunt the policyholder. While UBI carriers claim they don’t share the driver information they collect with third parties, some experts are wary of this promise, noting that insurers are legally bound to divulge the data when required by law, such as during a criminal investigation.

Ponder the following imaginary worst-case scenarios:

  • A UBI driver named John is involved in a serious accident that kills Mike, the driver of the other automobile. Even though Mike caused the accident, John’s UBI device captures data that could suggest to a jury that John contributed to or caused the accident, possibly leading to a conviction of vehicular manslaughter.
  • The data collected by your UBI device is used to implicate you in adultery in a divorce case by providing your vehicle’s location, date and time.
  • Your UBI device places you at the scene and time of a crime you did not commit.

"In these hypothetical situations, you are testifying against yourself — you have effectively waived your Fifth Amendment right against self-incrimination for a slight discount in premium. No amount of savings could persuade me to give up my Constitutional rights," says Kirchen.

Of course, the converse can also be true, meaning the data can be used to disprove those same scenarios.

"If there were some sort of immunity for the driver, anonymity of the data or some other measure that would keep the data from being used against the driver for something other than insurance purposes, perhaps more would be willing to go (the UBI) route," Kirchen says.

Deciding if you should get usage-based auto insurance

Still on the fence and about whether or not to dive into the UBI pool? Shop around, compare plans and quotes carefully, and consider these additional points:

  • UBI policyholders typically don’t have to worry about their policy being suddenly terminated or not renewed. However, the insurer may choose to remove the UBI discount and re-rate accordingly if poor driving habits are documented.
  • UBI insurance is currently offered in every state. Be aware, though, that each state regulates laws and stipulations related to this type of insurance differently. For example, in some states insurers are only allowed to consider the number of miles driven in determining the level of discount.
  • A small percentage of drivers have private passenger vehicles that are not compatible with the technology used by insurance companies and therefore are not able to participate.
  • Some insurers provide their UBI discount right up front, while others don’t pass on the savings until it’s time to renew.
  • UBI tracking technology can help your car be located if it is stolen or has broken down or been involved in an accident in a remote area.
  • UBI is expected to grow in popularity, with more insurers offering this type of coverage in the coming years. In fact, more than one-third of all auto insurance carriers are anticipated to use telematics-based UBI by 2020, per Strategy Meets Action research findings.

Mark is a Senior Research Analyst for ValuePenguin focusing on the insurance industry, primarily auto insurance. He previously worked in financial risk management at State Street Corporation.

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