The NAIC’s Center for Insurance Policy and Research (CIPR) released a white paper in March 2015 providing an excellent overview of the brave new world of automobile “telematics” data and their use in premium rate-making by auto insurance.

Telematics allow for the measurement of actual driving habits, through remote access to a vehicle’s real-time driving data. Thus, a driver’s actual experience can be studied in data transmitted from, for example, the vehicle’s navigation system, speedometer, odometer and tachometer, braking and acceleration systems, suspension system, engagement of anti-lock brakes, late-night driving habits and more.

Telemetry has existed in some forms since the 1980’s, which saw the advent of computer-managed systems in automobiles, and more so in the 1990’s as GPS became available for private and commercial use, and particularly in the trucking industry to manage operations more efficiently.

Usage-Based Insurance

More recently, auto insurers have discovered telematics as a means to better understanding the risks they are insuring. Information about actual driving experience allows insurers to much more accurately price their products, and predict risks.  Nevertheless, insurers face challenges in employing telematics.

First, the question of what data to store, and how, are critical.  According to NAIC’s research, “data sets can represent about 5MB to 15MB of data annually, per policyholder. An insurer with 100,000 insured vehicles can collect more than one terabyte of data per year.”  Insurers already face pressures in storing massive amounts of data, and the expense of storing data – particularly sensitive personal data – has been increasing, as the risk of data breaches has increased.

Another issue insurers face in employing telematics is determining what type of technology or hardware to rely on in order to collect the data.  There are a few types of devices currently being used, ranging from temporary “dongles” that can be easily installed and uninstalled in a vehicle, to more stable and permanent devices like the “black box” which is more integrated in the vehicle’s computer system, to smartphones, which are increasingly equipped with GPS, accelerometers and gyroscopes.  NAIC at 8-9.

Moreover, given the costs and other issues with massive data collection, it is critical that insurers collect only the right kind of data, so that they are not left sorting through haystacks of data to find needles of information useful from an actuarial standpoint.

The Benefits of UBI

The most touted benefit of UBI is that it gives consumers greater control over their premium costs.  It rewards those who already drive safely, and motivates those who do not to improve their driving in order to lower premiums.  Indeed, according to NAIC, evidence from Canada and the UK indicates that increased use of UBI improves driver behavior. Given the general societal benefit of increased road safety, it may be expected that policymakers will increasingly seize on UBI as a public safety issue.

The use of UBI may also reduce insurers’ reliance on other historical rating factors that at one time led to regulation against the use of certain rating factors – like credit scores and geography – that, while employed with sound actuarial intentions, sometimes resulted in unfair discrimination.  Particularlizing rate-making to individuals, rather than demographic groups, will mitigate potential unfair discrimination in older rate-setting models.

Not surprisingly, a number of carriers have already gotten into the game. According to NAIC, Progressive was first out of the box, and, “appears to be the most active and largest auto writer using telematics-based UBI, with its well-known and heavily advertised Snapshot program.”  Similar programs have been developed by State Farm, Allstate, Nationwide, Travelers and The Hartford.  The competition in this space is strong, particularly given that insurers that are late to the game risk losing access to low-risk drivers, while gaining access to an increasing market of higher risk drivers that are expensive to insure.

So What’s the Catch?

But what if you’re a bad driver, or a driver that logs long miles or drives mostly late at night?  A recent Towers Watson survey indicates that nearly half of all consumers still feel unease about potential higher premiums due to UBI.   According to one commentator, “[t]his continues to reinforce popular decisions to offer only discounts — not surcharges — based on UBI data. Insurers realize consumer concerns related to premium increases can have a dramatic impact on take-up rates for UBI. In the short term, most (if not all) companies in the U.S. have decided to eliminate this risk by promising not to surcharge based on driving behavior.” Id.

According to NAIC, “[i]t makes sense that someone who drives a lot, at unusual times and unsafely probably will not sign up for these programs. The early adopters will bring in good drivers and can rate them at fairly cheap prices. As the use of telematics grows, companies will have to include both increases and decreases to rates in order to avoid adverse selection. More precise pricing will reduce or eliminate cross subsidies.”  NAIC, at 25 (emphasis added).

The Future is Now

Indeed, within days of the NAIC’s publication of the white paper, Progressive announced that it was beginning beta-testing on a program that allows it to use telematics as a basis upon which to increase premiums for riskier drivers.  According to a Progressive representative, this change will result in “some customers who drive more aggressively (receiving) a surcharge (estimated to be no more than 10% of the rate they currently pay) at renewal.”  Id.

Inevitably, this will lead to questions: whose rates are going up?  Are there issues with unfair discrimination, particularly along socio-economic lines?  What if jobs that require people to drive farther, or more often during the late night hours, also happen to pay less? Will telematics penalize drivers who travel or live in more dangerous neighborhoods, where, for example, theft or drunk driving is more common?  Will the risks of potentially discriminatory rate-making be offset by improved road safety?  What about information privacy concerns?  Does anyone want their insurer to know they frequent bars or strip clubs?  Will telematics be used against insureds by law enforcement?

These, and an innumerable other imaginable questions and issues will begin to sort themselves out as insurers blaze this new trail.  So buckle up.  Your insurer will know if you don’t.