How Telematics is Transforming the Auto Insurance Industry
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For decades, insurance companies have calculated car insurance premiums based on factors like the age and value of the car, the driver’s age, and any history of traffic violations or accidents. Some factors used to evaluate driver risk even include a driver’s gender, whether that driver is married or single, and if that driver pursued higher education.
But these factors don’t provide reliable information about key elements, like driving habits, that can contribute to the risk of a driver being involved in an accident. With the development of telematics, car insurance companies have a new tool to evaluate drivers, and that tool is transforming the auto insurance industry.
- Telematics allows auto insurers to evaluate your driving patterns and habits, such as speed, travel distance, harsh braking and driving, and seat belt usage. This data helps them more accurately estimate your liability to the insurance company so that they can offer more personalized rates and discounts based on your actual use.
- Enrolling in a telematics program can save you money on your car insurance if you’re a safe driver with a good driving record. However, you also risk increasing your insurance costs if you often drive at night or have long commute times.
- Major insurance companies like Progressive, Allstate, and State Farm have been offering usage-based telematics-based programs for decades, creating a competitive edge for low-risk drivers who spend less time behind the wheel.
What is Telematics Car Insurance?
No one likes a backseat driver criticizing their driving skills. But what if that critic is your insurance company — and what if it’s offering you money to drive safely? That’s essentially how car telematics programs work.
Telematics means devices communicating wirelessly with each other. In the realm of car insurance, it means insurers collecting data about a customer’s driving habits from a small in-car tracking device or an app on your phone. This allows insurance companies to incentivize safe driving with discounts and collect vast amounts of data about how and when their customers drive.
Pros and Cons to Telematics in the Auto Insurance Industry
Using telematics offers many benefits to the auto insurance industry, including insurance companies and drivers.
Pros of Telematics
Thanks to the use of telematics, drivers with safe habits can reduce their insurance costs. Pricing becomes fairer, and good drivers are rewarded for their careful habits.
This benefit also applies to drivers who spend less time on the road than others. A driver who only uses their car to go to the store once a week shouldn’t have to pay the same rates for someone who spends hours on the road each day, since the two situations have very different risk factors. With telematics, drivers pay rates that more accurately reflect how they use their insurance coverage, making policies fairer for everyone.
Reduced Implication of Other Factors
If a car insurance provider offers discounts to customers who use telematics, those drivers may be able to offset the implication of other factors that they can’t really change. For example, some insurance providers consider a poor credit rating to be a sign of a high-risk driver, but improving a credit rating takes time. With telematics, a driver could demonstrate good driving habits for a reduced premium, which could help to offset the increases caused by their poor credit rating.
Increased Competition Among Insurance Companies
With car insurance providers already embracing the use of telematics and these more innovative pricing models, there’s increased incentive for companies to stay competitive and offer these benefits to their drivers, too. If car insurance providers don’t embrace telematics, they may lose their low-risk drivers, or those who spend minimal time behind the wheel.
Improved Driving Habits
If drivers know they’re being monitored, they’re less likely to engage in risky behaviors, like speeding or making sharp turns and braking hard. These improved driving habits contribute to greater safety, both for the drivers and everyone else on the road. Car insurance providers also see benefits from better driving habits, and may see their customers involved in fewer accidents.
When drivers know the miles they drive are being monitored and will affect what they pay for car insurance, they may be tempted to drive less. They may carpool more, take public transportation, or avoid long trips, all of which can benefit the environment. Less driving means less wear and tear on the vehicles, too, so drivers can better maintain their vehicle’s value.
Telematics can help drivers to save money on their car insurance. Given the fact that car insurance rates continue to increase, and the price of vehicles is also up, these savings come at a vital time. Lower car insurance premiums mean that more drivers can afford the insurance they need. Drivers may also use the money they save to pay for a new vehicle, or they might choose to increase their insurance levels so they are better protected. Saving money on car insurance means that drivers have more options and can better afford the policies that they need.
Cons of Telematics
There are also a few downsides to using telematics for car insurance.
Lack of Discounts for Long Commutes
While many drivers could save money because of their short commute, telematics can be problematic for drivers who have to drive more. Those long commutes add up to more time spent behind the wheel and more miles traveled, and that data can increase a driver’s insurance premiums. In this scenario, drivers with long commutes would save more money by sticking with traditional car insurance quotes.
Higher Rates for Driving at Night
Drivers who need to drive at night, whether for work or just because of their schedules, may also face insurance premium increases when they use telematics. Telematics evaluate the risk of driving habits, and driving at night is considered riskier than driving during the day. In this case, telematics could result in higher car insurance premiums because of when you drive.
Drivers worry they’re compromising their privacy.
The thought of an insurance company knowing when, where and how they drive is enough to make many people nervous. Insurance companies have privacy policies for their telematics data, but these can be broad. For instance, Progressive says it won’t share Snapshot data with a third party “unless it’s required to service your insurance policy, prevent fraud, perform research or comply with the law.”
Some users question the devices’ accuracy.
In online reviews, many users of insurers’ tracking devices express irritation and frustration with the number of incidents the device records, specifically “hard braking events.”
How Telematics is Transforming the Auto Insurance Industry
As technology has evolved, telematics are now more accessible to the auto insurance industry than ever before. Since drivers can now install apps on their smartphones to track this data, it’s affordable and easy for car insurance companies to collect this driving habit information.
When insurance companies have access to this data, they get a more accurate picture of your driving habits and risk factors. Rather than relying on generalizations, like the assumption that married drivers are less risky to insure than single drivers, telematics provide hard data that proves how safely or unsafely each customer drives.
The result is that car insurance companies can offer insurance premiums that are personalized based on a driver’s behavior, time spent on the road, distance traveled, and more. Drivers may be eligible for discounts on their insurance, and rather than being lumped into a group, they are truly paying for their own driving risks and the ways that they use their vehicles. When premiums are based on the time spent driving or the mileage covered, drivers who work from home or who have vehicles, like RVs, that they only drive occasionally stand to save money.
The ability to monitor the time that each driver spends on the road means car insurance companies are able to offer several new insurance plan options.
Pay as You Drive Insurance
Pay as You Drive plans structure quotes based on how drivers use their vehicles. Drivers who spend lots of time on the road will pay more because of the increased risk, while drivers who only drive occasionally will pay less. Some companies may ask drivers to run telematics continuously during the insurance period, giving them data on just how much time they spend driving.
Similar to Pay as You Drive Insurance, Distance-Based Insurance prices are based on how far drivers drive each year. The premium is quoted based on how many miles a driver covers during an insurance period, and telematics make it easy to track and access that information.
What are the Top Car Telematics Programs?
Since Progressive first began testing car tracking programs in 1998, car insurers have raced to successfully create programs of their own. By 2020, according to an SAS white paper on big data and the insurance industry, more than 25 percent of all auto insurance premium revenues in the United States will be generated from policies using car tracking programs. Here’s a quick look at a few major insurers’ pay-how-you-drive programs.
- Progressive Snapshot considers how often you brake hard, how many miles you drive each day, how fast you drive, and how often you drive between midnight and 4 a.m. Drivers plug in the device for six months or download the Snapshot app on their phones to set their discount, which runs up to 30 percent, and can even try it if they’re not yet Progressive customers to see how much they can save.
- Allstate Drivewise measures the same things and says miles driven are the most important factor in calculating your discount. Allstate offers a 10 percent discount just for signing up and recalculates your discount, which goes up to 30 percent, every six months.
- State Farm Drive Safe & Save offers discounts as high as 50 percent for safe driving with this program. The catch? To participate in Drive Safe & Save, you need to pay for a third-party vehicle tracking and communications package, such as OnStar, SYNC (for Ford vehicles) or In-Drive from Verizon. This means State Farm can track your vehicle via GPS, although they state it only receives information about the general areas in which a vehicle is driven.
- Metromile is a new entrant into the car insurance industry that offers pay-as-you-drive policies for low-mileage (under 10,000 miles a year) drivers in California and a handful of other states. It uses a free tracking device and an app that gives you driving stats and car diagnostics.
Using Telematics to Save on Car Insurance
Many insurance providers are now offering discounts if you use telematics. Some of these providers require you to use telematics for a set period of time, while others may require you to always use the technology. You will need to consider which arrangement you are comfortable with, and which policy is right for your needs.
Which telematics program is right for you?
The best way to determine this is to compare auto insurance quotes and see what your options are. Our auto insurance comparison tool allows you to compare quotes from 70+ top insurance companies – some that offer telematics and others that don’t.
With all the information you need, you can determine the best route to take to save on your car insurance.
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