Would You Let Big Brother Ride Along for Cheaper Insurance?
By Chris Haak
Several major automobile insurance companies worldwide, including Progressive and GMAC in the US, as well as a few smaller companies, are offering substantial insurance discounts to drivers who allow the companies to install a “black box” in their vehicles that monitors their behavior behind the wheel.
The devices are generally slightly different in function an purpose depending upon which insurance company has provided it, but they typically monitor miles driven, the speed at which the car is driven, and how often and how hard the brakes are applied. Analysts expect that the typical driver who agrees to so-called “usage-based insurance” can expect to save about $270 in premiums per year, although the companies reserve the right (in some states, at least) to assess a bad driving surcharge of up to 9% (in the Progressive plan). Drivers that Progressive deem as “good,” however, can see savings of up to 60% per year, again depending on what their home state allows.
Progressive currently offers the plan, called TripSense, in only Michigan, Oregon, and Minnesota. The company is replacing the TripSense program with a new one called MyRate, which includes a telematic device (similar in concept to OnStar) which will automatically transmit driving habit information to the insurer. The older TripSense product requires the customer to periodically disconnect the device from the vehicle’s diagnostic port to connect to their computer, then send it to the company. Progressive’s new product will be available in six more states by the end of 2008 and even more states thereafter.
GMAC Insurance offers a product similar in concept, but that is tied to GM’s OnStar telematics service. The program is called GMAC Low Mileage Discount Program with OnStar, and requires that the driver have an active OnStar subscription. The program gives drivers a 5% to 8% discount just for signing up for the service, and a 26% discount if they drive less than 26,000 miles per year. At this point, the OnStar device only transmits odometer readings to the insurance company, but has the capability to transmit location, acceleration, G-forces, and more. (I’ve read several buff book test drives where the writer described getting a call from OnStar in response to a slalom or skidpad test, in spite of there being no crash or airbag deployment. So the system DOES know what you’re doing.)
So, how many people actually are willing to give up some of their privacy and freedom for lower insurance rates? GMAC claims that they have 2,000 subscribers to their program (it is available in 34 states), and in the three states where Progressive offers its program, 34% of its customers who signed up for insurance online (rather than through a local agent) have elected the usage-based rates.
I’m not a tinfoil hat kind of person, but I frankly would not be willing to effectively have my insurance company riding shotgun with me for literally every mile that I travel just to save a few hundred dollars per year. I’d have to believe that the insurance company is able to get odometer readings from annual policy renewals (my company asks me for an odometer reading annually, which is only a matter of walking ten feet to the garage door with a pen and paper). Also, letting the company in the door with a telematics device as powerful as OnStar – which only tracks mileage currently, but could easily provide acceleration, deceleration, and lateral acceleration rates – not to mention the exact location and speed of your vehicle – to the insurance company – doesn’t seem like something I’d be interested in doing.
Another issue is that one of the most fundamental tenets of insurance is the avoidance of adverse selection. It’s why you can’t sign up for life insurance when you’re terminally ill, or why you have to wait until the end of the year to change your health insurance. At its fundamental level, adverse selection means that you make a choice because you are sure it will happen, while the other party does not have that information. If only unhealthy individuals bought health insurance, rates would be sky-high because the low-risk pool who are healthy aren’t paying premiums and helping to defray the expensive claims of the unhealthy population, while incurring few or no claims of their own.
In terms of car insurance, with these programs, the money to pay for 50%+ auto insurance discounts for “tracked” drivers has to come from somewhere (assuming, likely correctly, that the insurance companies are uninterested in seeing their overall revenue decline). That “somewhere” will be the people who would prefer not to have the insurance company’s black box riding along. Those of us who see the black box as an intrusion of our privacy, or something otherwise undesirable, will eventually be seen as a greater insurance risk, and will therefore see higher premiums – and in my case, my clean driving record be damned. It’s not a huge logical leap to see that as these usage-based car insurance programs gain in popularity, they will come to be seen as the norm.
Folks who drive far less than their policy allowances, and in a “responsible” (as defined by the insurance company) will indeed see lower premiums. As high gas prices cause drivers to eliminate unnecessary trips and generally reduce miles traveled, large swaths of the driving public could see lower rates through programs such as these. It’s nice in theory to say “yeah, charge those scofflaws/bad drivers higher rates, and I’ll take my black box,” but it won’t feel quite as good to see your rates jacked up for pressing that brake pedal a bit too hard, and therefore subsidizing someone else’s discounted rates.
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