Pay-as-you-drive, telematics and usage-based insurance are all terms used for programs that offer drivers the option of having premiums tailored to their individual driving patterns.
The programs give drivers a financial incentive to drive less and, depending on the information that is monitored, to drive more carefully. The more positively they react to the incentive, the less they pay for their auto insurance. (With commercial programs, the fleet owner benefits through a lower premium.)
At their simplest, usage-based programs record the actual miles driven, offering those who drive less than average a lower rate.
A growing number of auto insurers are offering more complex programs that also take driving behavior into account. These use a telematic device installed in the car to relay information about when and how a car is being driven.
Using the number of miles driven and a driver’s safety record to help calculate auto insurance premiums is nothing new. Both are taken into account in calculating premiums for traditional policies. With traditional policies, drivers are generally asked by their insurer when they apply for a policy, and periodically throughout the period that they remain insured with the same company, to estimate the number of miles they drive each year. However, many underestimate mileage and some may overestimate it. Usage-based programs provide continuous updates on mileage.
A driver’s safety record has always been a significant factor in the ultimate price of coverage, but unless the price goes up significantly after an accident or speeding ticket, drivers do not always link price to the way they drive. Telematics technology provides immediate feedback about the riskiness or a driver’s behavior and therefore may be more successful in changing bad habits.
To monitor a customer, the insurer provides a device called a “dongle,” which is hooked into the car’s computer systems. Typically, the dongle monitors when and where a car is driven along with the length of the trip. Some devices can monitor the speed of the car, use of seatbelts, engine temperature and “acceleration events” — for example, speeding up and braking.
If vehicle operators are more aware of such behavioral factors, they may actually become better drivers. Studies indicate crash rates fell between 20 percent and one-third in cars monitored via telematics.
For the insurer, savings from better driving must offset the costs of technology and any telematics-based discounts. Instead of permanently installing the dongle, some insurers only let drivers keep the device for about six months. In that time, the driver has gotten enough feedback that he or she will have learned to drive more safely, triggering the insurance savings. Then another customer receives the device, starting the cycle anew.
Progressive Insurance, an early pioneer in the field, developed a usage-based product in the mid-1990s. The Snapshot product generated more than $2 billion in premium in 2013, according to the company’s 10-K filing. Other large insurers such as State Farm and Allstate also have products in many states, as does the Insurance Services Office (ISO, a Verisk Analytics company), which files on behalf of many smaller insurers.
Usage-Based Auto Insurance. Towers Watson, 2013.
© Insurance Information Institute, Inc. - ALL RIGHTS RESERVED