Safe drivers could earn substantial discounts, but is the loss of privacy worth it

http://www.chicagotribune.com/classified/automotive/ct-biz-0918-insurance-20110916,0,4018411.story
By Ameet Sachdev, Tribune reporter
9:52 p.m. CDT, September 16, 2011

Your car knows everything
Insurance companies want to install electronic tracking devices in your car to monitor your driving. Safe drivers could earn substantial discounts, but is the loss of privacy worth it

A few months ago, Saman Jayasekara was shopping online for cheaper car insurance when he came across a new product from Progressive Corp. that offered him the chance to save as much as 30 percent.

But there was a catch. He would have to install a device in his Hyundai Sonata that would monitor his driving habits, such as when he drove, miles driven and number of sudden stops. Progressive would analyze the data to determine whether he deserved a discount.

Jayasekara, a software programmer in New Jersey, enrolled, and after a month he received a 23 percent discount, which could save him hundreds of dollars a year.

"Everybody is scared of being monitored," Jayasekara said. "But I'm happy with my discount."

Progressive was one of the first insurers to venture into what people in the industry call "usage-based" or "pay-as-you-drive" insurance. Now, State Farm has begun offering an in-car monitoring system in Illinois, eight months after Allstate Corp. launched a program in the state. Evaluating actual driving data is considered a more precise way to gauge risk compared with traditional pricing methods that factored in, for example, age, gender and marital status.

More accurate pricing has benefits for consumers and the insurance industry.

Proponents say usage-based insurance creates a fairer insurance system because generally safer drivers and people who drive less have subsidized the costs for those who drive more or more recklessly. Progressive, widely considered the leader in usage-based insurance, said the average savings for drivers who have earned a discount is 10 to 15 percent. Not every motorist who elects to be monitored receives a discount, and rates will not go up based on performance, insurers say.

Insurers also predict that in-car monitoring will encourage safer driving or, at a minimum, reduced driving, which could lead to fewer crashes and insurance claims. That has transportation officials and regulators excited by the potential social benefits of usage-based insurance, such as reduced congestion and pollution emissions.

"As a matter of public policy, pay-as-you-drive programs make a lot of sense," said Adam Cole, general counsel of the California Department of Insurance. "We want to create an incentive for insurance companies and consumers to participate in these programs."

But there are trade-offs. Although the programs are voluntary, consumer and privacy advocates are concerned that insurance companies are becoming "big brother." State Farm is stretching privacy boundaries further by including GPS in its recording device to track a vehicle's location. The company said it is not using location data to calculate premiums but to offer roadside assistance and other services.

Usage-based insurance also affects the basic financial model of insurance, that for every discount there is a corresponding surcharge, because insurers have to collect enough in premiums to cover their potential exposure. If safe drivers start paying less, will high-risk drivers have to pay more?

"It's clearly an outcome that could possible occur, but we're not ready to make that determination yet," said Daniel Kraft, Allstate's director of new product and service development.

The uncertainty plus the privacy concerns make some question whether usage-based insurance will become a mainstream success. Even some insurance companies say the product is not for everyone.

"We knew right out of the box that some consumers would not want it because they don't want a box in their car gathering details on how they drive," Kraft said.

Kraft described the target customer for its Drive Wise program, which can provide savings of up to 30 percent, as someone who lives in an urban area, takes public transportation to work and drives a few thousand miles a year.

That would probably rule out a motorist with a safe driving record who commutes to downtown from Naperville every day, because of the number of miles driven every year, Kraft said.

"I think what we want to do is make sure people enrolling can really benefit from the program," Kraft said.

In a sign of how small the market for usage-based insurance could be, Allstate told the Illinois Department of Insurance in a regulatory filing in December that it expected only 6 percent of its customers in the state would enroll in the program.

Kraft declined to say how many Illinois motorists have enrolled in Drive Wise, except to say that Allstate is pleased with the response. Based on premiums written in 2010, Northbrook-based Allstate had about 9 percent of the Illinois passenger car insurance market, or about 761,000 vehicles, according to the company and the Insurance Department.