Big Data Is My Copilot: Auto Insurers Push Devices That Track Driving Habits

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Increasingly, Big Data – make that Big Brother? – is in the front seat of your car, and is affecting how much you pay for auto insurance.

In theory, “usage-based” or “pay-as-you-drive” insurance sounds perfectly reasonable and fair. Instead of profiling drivers based just on the traditional factors—age, location of residence, history of accidents and traffic violations, and so on—a small device is installed into the car that monitors how drivers actually drive.

These programs, including Allstate’s “Drivewise” and Progressive’s “Snapshot,” have been available for several years in select locations on a strictly voluntary basis. Drivers have been welcoming these devices into their cars because, at least for now, they’re being presented on a “discount only” basis. That is, drivers whose habits are deemed to be sufficiently safe—easy on the brakes and gas pedal, limited long-haul trips or driving during “risky” hours—can see their premiums drop by 5%, 10%, sometimes upwards of 30%.

On the downside, consumer advocates worry that these devices cause drivers to give up their privacy, and that no one really knows what the long-term repercussions could be by welcoming insurance companies inside cars. Just about every article written on the topic includes the phrase “Big Brother.”

Now, reports the Wall Street Journal, these programs are expanding in a big way. State Farm, the country’s largest auto insurer, has plans to promote its “Drive Safe & Save” program in nearly every state by the end of 2013. The main selling point is that by accepting these devices in their vehicles, customers can prove that they’re safe drivers who deserve cheaper insurance rates.

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Certain categories of people who are generally assumed to be unsafe drivers stand to benefit in particular. “We know that 16-year-old drivers have a whole lot of accidents,” Scott Bruns, State Farm’s telematics expert, told the Wall Street Journal, “but not every 16-year-old is a lousy driver.”

Some have been skeptical about the degree to which drivers would readily welcome insurance companies into the front seat of their cars. In a Businessweek post published last autumn, two consumer behavior experts predicted that these pay-as-you-drive programs “won’t move the needle much” mostly because the less-than-exemplary drivers out there won’t let insurers into their vehicles. And the safe drivers will have reason to be bitter about getting cheaper rates once the driving monitors are placed in their cars:

For the proud few who qualify as safe drivers, these companies will essentially acknowledge that they’ve been charging you too much for insurance and share some of the readjustment savings with you.

Some fear that those who don’t sign up for the programs will be lumped into a higher-risk pool and assumed to be unsafe drivers, and therefore faced with higher rates. Critics also have a problem with some of the driving habits that are deemed unsafe. It makes sense to penalize drivers for superfast acceleration and repeatedly slamming on the brakes. But as a St. Louis Post-Dispatch columnist pointed out, drivers who work nights—and are regularly out on the roads during hours regarded as risky statistically—are less likely to get discounts. Ditto for workers who have long commutes, who suffer due to the theory that the more you drive, the more likely you are to be in a traffic accident.

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Then there’s the privacy issue. Lots of people hate the idea of having to give up their privacy in order to have a chance at cheaper insurance rates. But because the potential discounts are so substantial—State Farm’s discounts run as high as 50%, Progressive says its discounts top out at 30% and have saved drivers $125 million—it’s no wonder drivers have signed on, privacy concerns be damned. Since 2008, over 1.4 million Progressive customers have registered with its “Snapshot” program.

Insurance companies aren’t exactly eager to slash the premiums they collect annually, of course. That wouldn’t make much business sense. But check out how these programs really work. As the Post-Dispatch story describes it:

Driving with [Progressive’s] Snapshot is like having a nanny hiding in the seat well. It beeped at me when I braked too hard or floored it up the ramp to Highway 40. Each beep, I knew, was a demerit that could mean a higher insurance quote.

Drivers also get little online merit badges for especially safe practices—like not driving for a week because, say, you fly out of town for an extended vacation. The system of positive and negative reinforcement is supposed to produce safer drivers—drivers who don’t get in accidents, and who will be far less likely to file auto insurance claims. In other words: ideal auto insurance customers!

The fact that insurers have introduced these programs on a “discount-only” basis surely has helped the sign-up rate. Drivers have the devices installed and give them a shot, with the idea that their rates may decrease, and, in the worst case, no-harm, no-foul fashion, are not supposed to go up just because of the monitoring.

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But it’s unclear whether this is how the system will work in the future. “At its May presentation, Progressive told analysts and investors that it is an open question if usage-based programs will remain ‘discount-only’ models,” the Wall Street Journal noted. In other words, insurers could change the rules at any moment and perhaps start jacking up the rates above the norm because drivers have been detected to be hitting the gas pedal hard, or just on the roads more often late at night.

Just think how annoying those beeping devices would be then.