Background
I am a hard-boiled Property & Casualty Insurance Consultant. Please bear with my pedantic writing on this topic to start with!
Usage Based Insurance (UBI) has existed for a long time. Self-reporting policies are a form of UBI too; the kind where you declare to the Insurer while taking out a quote initially that you would drive, say, 12,000 or only 6,000 miles a year and the nature of usage is for Office commutes/Leisure/School etc. You get to control your premium by the self-reporting. Of course, you could always lie and under-represent your actual usage or state you would only use it for leisure and then use it for commutes, and then when you submit a claim the Insurer would deny it stating that you had lied at the start about the actual usage.
The
number of miles driven per year and
nature of usage are primary factors used in fixing your rate. They play a huge role, needless to say, in arriving at your final premiums. The more you drive, the more risky you are for the insurer to insure you. Likewise, office commuting is the riskier exposure when compared to leisurely usage.
The other major primary rating factors are - your garaging zip code, age, marital status etc.
Telematics technology has given a new lease of life to UBI of late. On a live basis, telematics enables insurers to track the following-
- How you drive (lateral 'G' forces, braking forces etc.),
- How fast you are driving,
- Time of the day when you drive,
- In some cases, your location at any given time
- Duration of each trip etc.
How Telematics works
There are four major ways of making telematics tech work for insurers and you:
- A dongle that plugs into the OBD port- I used just such a device provided by Progressive. This is the most prevalent device in the US market today. This device would have a SIM card in it through which data would be relayed to the insurer on a live basis via a telecom network. Needless to say, insurers are relying on major telecom providers such as Hughes Telecom/Verizon currently.
The significant points to consider here are:- According to a White Paper by the National Association of Insurance Commissioners on Telematics technology, OBD plug-in devices will become obsolete in a few years (3-5 years maybe?)
- A single insurance customer may generate around 150MB of data a month according to Industry sources. Telecom providers charge the insurers a fixed rate per MB (price unknown) and then, each device costs ~$40 for the insurers. Then they need to store and analyze Petabytes of data. They would need to breakeven by overcoming maybe $50-$70 per customer.
- Addendum to point 2 above, how do they breakeven when premiums go down because a person like me can get a full 30% premium discount? This is a complex calculation indeed, taking into consideration the lack of actual crashes from a "safe" customer. Interesting.
- A Blackbox that is fitted in the engine-bay - State Farm Insurance offers this as an option, I have heard. This is supposed to be tamper-proof compared to the OBD dongle. Everything works the same way as with the former device.
- Via smartphone apps - In the Japanese and European markets, I hear that Telematics apps on customers' smart-phones is a roaring success. Breakeven becomes very easy for the insurers. All trends point to this model taking off in the USA eventually. If you think about it, Smartphones come loaded with all kinds of sensors & technology, and it makes sense for the insurer to capitalize on this.
- Via third party technology - GMC provides OnStar in its cars and State Farm insurance company already offers GMC car owners an option to relay data to State Farm via OnStar. This helps in breakeven too.
How it actually plays out for the customers
Just by signing up for a Telematics device, most insurers offer a small one-time sign-up discount. I guess this is to the tune of 5-10% in the industry. Then comes the actual part-
- If you drive less, you pay less premiums. Pay as you drive/pay as you go.
- If you brake hard, you pay more/don't get a discount. This is measured as an average of number of hard brakes per 100 miles.
- If you turn hard and fast (causing high lateral 'G's), you pay more/don't get a discount.
- If you drive in unearthly hours, most commonly between 12:00 midnight to 4 AM, you pay more/don't get a discount.
- So far speeds and geo-location haven't been used to calculate premiums. But the day is not far off when insurers could rate you based on your speeds versus the legal speed limits where you were driving at different points in time.
Based on the above, most insurers offer you a monthly dashboard which you can login to their website and access. All the data and analyses, graphs etc. are made available. Also, some insurers re-rate you on a 30-day cycle based on these monthly reports. Some insurers make you wait an entire policy term and the discounts, if any, kick-in only at Renewal.
The highest and most common discount is 30%.
Progressive is said to be experimenting with punishing bad drivers based on the telematics data, but for the most part, you only stand to gain discounts or nothing as of today.
My experience with Progressive's 'Snapshot'
I was new to the States and was considered a 'Risky' driver with a mere 10 day driving experience (my experience in India notwithstanding). GEICO started me out with a $200/month premium for my used 2011 Nissan Rogue S in November 2013.
In 30 days, I switched to Progressive and the premium came down to $150/month. I also signed up for their Snapshot telematics device. I received it in a week and plugged it in the next day.
The factors Snapshot collects are:
- Time of the day driven (12 midnight to 4AM being risky)
- Speeds (with zero premium impact)
- Hard braking
- Number of miles driven
- Duration of each trip (zero premium impact)
30 days after signing up with Progressive, I started receiving detailed dashboard reports and straightaway my premium dropped to $105/month. I got the full 30% discount because I drive maybe only a 100 miles a month in the winter and it was the winter. Even in Spring when i took my car on long roadtrips (longest being 500 miles one way), the premium stayed put. I also only averaged 0.5 hard-brakes/100 miles. (Yes, I am a good driver!)
I was very happy to prove myself to the insurance industry that I am not a 'Risky' driver. Telematics gave me the opportunity to actually prove myself and am proud of this to this day.
Not everyone gets the full 30% discount. Sheer driving indiscipline leading to hard-braking is the biggest reason why people don't get more than 10% discounts.
Meanwhile after 4 months' usage, they asked me to return the device ASAP or pay a $40 penalty. The UBI-Telematics discounts stayed on. But at Renewal, they jacked up the premium to $120/month since the one-time Snapshot sign-up discount no longer applied to me. I bade good-bye and returned to GEICO at $90/month and I have stayed with them since then.
Epilogue
Since you have come this far in this post, I should buy you a coffee.
Also, estimates say that Telematics will only explode further in the North American insurance/Auto industry in the next few years. Give it a shot if you can sometime in the future. It could be worth it*.
*
Conditions apply