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Auto Insurers Taping Into Devices to Help Set Rates with "Pay-Per-View" Era

Source: Joseph White, WSJ

Posted on 13 Jun 2012 by Neilson

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Auto insurance ratesAuto insurers are accelerating efforts to tap into the systems that enable a car to communicate with satellites and mobile data networks, and use information about how you drive to set your rates. The companies say that basing your premiums on how and how much you drive—a concept known as user-based insurance or "pay-as-you-drive" insurance—will allow them to accurately target discounts at careful drivers, and charge more spirited customers an appropriately higher amount.

"Consumers are going to see more of this," says Richard Hutchinson, general manager of Progressive Corp.'s usage-based insurance.

Most of the user-based insurance programs offered now, such as Progressive's "Snapshot" or State Farm Mutual Automobile Insurance Co.'s "Drive Safe and Save" program, woo consumers with promises that they won't pay more if they agree to let the insurance company peek over their shoulders as they drive. The companies emphasize the discounts of 30%, 40% or even 50% they might offer to those who do well according to the electronic monitors. The Hartford Financial Services Group late last year began offering a usage-based program called TrueLane in about a half-dozen states. Allstate Insurance Co.'s DriveWise program offers a 10% discount just for signing up.

Insurance companies have been experimenting for several years with technology that collects data from individual drivers. That technology is getting cheaper, the data are getting more reliable, and some car companies are starting to offer insurers access to their onboard-telematics systems to harvest driving information to tailor insurance premiums to an individual's behavior.

State Farm, the biggest U.S. auto insurer, offers user-based auto plans in four technology formats. It offers at least one of these systems in about a dozen states. It has made agreements to collect driving data through General Motors Co.'s OnStar telematics system and Ford Motor Co.'s Sync telematics system.

To qualify for the biggest discounts of up to 50%, you would likely have to agree to install State Farm's "In-Drive" communicator device, travel no more than a paltry 500 miles a year, and be pretty sedate about it, according to State Farm's website. The In-Drive device measures distance traveled, the time of day (late-night trips can trigger higher rates), whether you indulge in hard acceleration or sudden stops, make abrupt turns or speed faster than 80 miles per hour.

An average driver who travels about 11,000 miles a year could expect a discount of about 12% from the rate they might get under a standard program, State Farm says. State Farm spokesman Dick Luedke says the average customer who signs up for one of State Farm's programs gets about 10% off.

"The company that can be most accurate in measuring risk is the company that is going to win the game," he says. "If you are a really safe driver and we are not able to measure that, you are going to get a better deal from somebody else."

That is the view that Progressive, the fourth-biggest U.S. insurer, is taking as it rolls out its Snapshot individual rating system out in 42 states, with plans in motion to expand to California and several other states, Mr. Hutchinson says.

The Snapshot system uses a small digital device that plugs into the car's diagnostic port, usually located on the lower edge of the dashboard.

The company's most recent data from March 2011 says about 500,000 customers had signed up for Snapshot, but Mr. Hutchinson says that number has grown since. But, the number of people ready to trade information about their driving for a discount is small compared with Progressive's total 12 million auto-insurance customers.

Earlier this year I tried Snapshot in a car driven mainly by one of my college-age kids. The device is easy to install, and you know it is working because it starts to chirp at you if you try something it considers too risky—such as backing out of the driveway without fastening the seat belt. (For the record, I was just moving our cars a few feet to get them in the right order for the morning departures.)

After about two months, I got a message from Progressive that, based on the data collected, I wasn't entitled to a discount, and a reminder to ship the Snapshot widget back in a small box the company provided, or risk a $50 lost-gadget charge.

Progressive's Mr. Hutchinson and other insurance executives say not many young drivers get a break from user-behavior monitoring systems, especially those that penalize drivers for sudden stops or abrupt turns.

"I have yet to meet a teen who wants this," says Nate Bryer, new product development manager at Allstate.

Consumers have shown they will volunteer to give companies private data in return for a price cut, but they usually reject coercion, and insurers say they don't want to try it. The same goes for using telematics to track where customers drive. "We stayed away from that because of privacy issues," says Mr. Hutchinson.

State insurance regulators—who are attuned to the risk of political backlash should insurance rates suddenly jump—present another speed bump. They demand hard data to justify rating schemes that charge more because somebody drives more miles, industry executives say. Insurance-industry executives say they are increasingly confident that data they have harvested from consumers' cars support their new price ladders.

How quickly user-based insurance will jump from niche to mainstream is a subject of debate among insurance-company executives.

At a telematics conference in suburban Detroit last week, Allstate's Mr. Bryer prompted chuckles from his competitors when he said that telematics-enabled insurance pricing could grow to 70% of the market in 10 years. However, he and his rivals agreed it is likely that user-based insurance could account for about a fifth of the market within five years.