The next big thing in car insurance could be a small device placed in your vehicle that tracks your driving habits and determines just how safe a driver you are. In California, usage-based insurance savings could be worth an average of $276 per vehicle for the majority of state households (according to a report by the Brookings Institution) but many are concerned about the potential loss of privacy.
How Does it Work?
Proposition 103 requires insurers to set their insurance rates based upon specific factors, including the number of miles driven each year. Assembly Bill 2800, which passed in the California Senate Appropriations Committee, allows insurers to more accurately base premiums using mileage information.
Consumer advocacy group Consumer Watchdog expressed concerns around the bill, stating that the bill "...would force drivers to choose between fair insurance rates and protecting their privacy."
However, Insurance Commissioner Steve Poizner, proposed a plan with three options for reporting mileage:
Poizner's proposal would maintain the incentive of usage-based insurance while giving consumers more freedom to choose exactly how the information would be gathered.
The Company Line
The LA Times reported that most insurance companies were generally in favor of the plan. Annual mileage is an important factor in setting insurance premiums: fewer miles driven means fewer accidents and lower rates. Insurance companies are also intrigued by the fascinating—and potentially disturbing—additional information that some of the electronic monitoring devices can report, helping those companies determine which drivers are more likely to have accidents—and who should pay more for insurance.
A Real World Example—MyRate by Progressive
Progressive's MyRate program is a usage-based insurance program that uses an installed device similar to that of the usage-based proposal, though their device and program are more sophisticated. Their device uses cell phone technology to call a central computer to report driving information to the company. It's being tested in several states before a national rollout, once regulatory approval is attained.
Richard Hutchinson, Progressive's MyRate General Manager, said that the program was designed "...primarily for lower-risk drivers who are consistent and safe. They drive at low risk times of day and they keep alert for others on the road. They don't make fast lane changes or follow too closely behind other drivers so they don't have to over-react or slam on the brakes."
While the MyRate program differs from the California proposal in that it tracks more than just mileage, these additional factors relating to the driver's behavior are reported back to the insurance company and are part of an overall assessment and combine to either lower rates—or raise them.
Winners and Losers
Usage-based car insurance is best suited for low-mileage drivers. If you drive more miles than you have reported to your company in the past, you may find your premiums increasing, regardless of your driving habits.
Currently rates are based on the information actually reported to the companies by the drivers. Most drivers estimate annual mileage, and few realize that there may already be potential discounts available if they drive less than 10,000 miles each year. Sometimes these potential savings don't come up until drivers compare rates between auto insurance companies.
Save Money, Save the World?
Environment Defense, a nonprofit environmental group, estimates that usage-based car insurance could reduce driving and congestion by 10% to 12%, while reducing air pollution and other negative environmental impact from vehicles. With fewer cars on the road, the number of accidents and injuries could also fall.
Risk Versus Reward
Some of the main objections will always revolve around privacy. While the legislation and counter-proposal in California currently revolve around only mileage tracking, eventually most of these devices will contain GPS technology, allowing insurance companies to not only track how far and how fast you've traveled, but also where and when. These are all risk factors determining your premium. For some people, this level of transparency and disclosure is totally unacceptable, and not worth any amount of insurance savings. For others, with nothing to hide, paying less for car insurance might prove very tempting indeed.
What Would You Do?
So, are the potential savings worth it? Would you voluntarily place a tracking device in your vehicle for auto insurance savings? Let us know!
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