Pay-As-You-Drive Auto Insurance

Winston-Salem, NC 12/11/2013

Pay-as-you-drive auto insurance is the term now commonly used for usage-based programs that offer drivers the option of having customized premium rates.  The idea behind usage-based programs is to give drivers a financial incentive to drive less and, depending on the information that is monitored, to drive more carefully. The more positively they react to the incentive, the less they pay for their auto insurance.  Currently, no insurance companies are able to sell such policies in the State of North Carolina. NC Legislators and Insurance company officials are working together in hopes of approving this new type of discount sometime in 2014.  

Historically, insurance companies offered discounts of 5 percent to 10 percent to those who drive just a few thousand miles a year. Now, technology exists to let those drivers opt in to a new type of usage-based coverage called pay-as-you-drive insurance.  Under this program, drivers voluntarily plug a high-tech device into their vehicle that records the miles traveled and when the automobile is driven and transmits the information to the insurer. Armed with this detailed data, insurance companies can offer discounts of 25 percent to 50 percent to some drivers.
 
Two companies, Progressive Casualty Insurance Co. in Cleveland, Ohio, and GMAC Insurance in Winston-Salem, N.C., offer pay-as-you-drive insurance in multiple states. Other providers, such as The Hartford insurance company in Hartford, Conn., and Bellevue, Wash.-based Unigard Insurance Group, report that they are pilot-testing similar programs.  "For consumers who view themselves as lower-mileage drivers, this is a very innovative way to save money," says Richard Hutchinson, general manager of usage-based insurance at Progressive.
 
Despite the promise of lower rates, this trend troubles some privacy advocates. Pay-as-you-drive technology can tell insurance companies when you're driving and maybe even where you're driving, says Richard Holober, executive director of the Consumer Federation of California. If the data isn't needed to compute rates, he says, they should not collect it. "We're concerned that there are those in the insurance industry who would like to gather a lot of information that's not their business," Holober says.  People in the insurance industry agree that privacy concerns are important, but they say there are safeguards in place to protect consumers.  "Each insurance company has a privacy policy that's audited by the department of insurance," says Sam Belden, a vice president at Insurance.com, an online auto insurance agency based in Solon, Ohio. "I can't think of many more regulated industries than insurance."
 
David Snyder, vice president and assistant general counsel for the American Insurance Association, an industry trade group in Washington, D.C., added that insurance companies collect data for the purpose of setting rates. "If they're going to use it for other purposes, they must get permission from the consumer," he says. The question for consumers is: Are reduced insurance rates worth sharing your personal driving information with your insurance provider?
 
1. Low-mileage drivers benefit the most.  John O'Donnell, vice president of business development at GMAC, says that his company implements a tiered system for low-mileage discounts, starting at 15,000 miles driven a year.With 15,000 miles, the discount is 13 percent off the driver's premium, he says. From there, discounts climb progressively to 54 percent for people who drive less than 2,400 miles annually.

Even auto owners who drive several thousand miles a year can save money with these plans if they have secondary cars.  "People who have multiple vehicles in their household can benefit if they have one vehicle that isn't driven as much," Hutchinson says. That car could be in a pay-as-you-drive program, while the other vehicles are insured with traditional coverage.  The insurance company would still need to determine a driver's regular rate before it could offer the discount.  "If you call for a quote, you'd still go through the data collection exercise of providing your name, address and type of vehicle," Hutchinson says. You'd also be expected to provide personal information, such as your marital status, Social Security number and prior insurance history.

If you're a candidate for Cleveland-based Progressive's low-mileage program, called MyRate, you'd be invited to join after receiving your initial quote. As a first-timer, you could earn a policy discount of 10 percent off your regular rate. When it's time for the policy to renew -- typically in six months -- the rate would adjust based on your driving habits. Customers generally receive a discount of 10 percent to 15 percent each term period, Hutchinson says.

2. You may have to pay for the high-tech gearMost drivers who sign up for Progressive's MyRate program have to pay $5 a month for the device they install in their vehicle. "That covers the technology involved and the transmission expense, because it is a cellular device," Hutchinson says.  The equipment is about the size of a cigarette lighter, and it connects to the vehicle's diagnostic system. Insured vehicles need to be a 1996-or-later model in order to support the technology, he says.

Under GMAC's version of the low-mileage insurance program, customers must be active subscribers of OnStar, an auto security and emergency-assistance system, before they can participate. OnStar is a wholly owned subsidiary of General Motors, and the service is only available in newer GM cars, mostly 2004 models or later. A subscription to OnStar costs about $200 annually, although the first year is complimentary for newly purchased autos. That subscription price might wipe out some or all of the savings gained from the discounted auto insurance, but it also can be viewed as a way to subsidize OnStar's annual fees, O'Donnell says.  Before signing up for any program, consumer advocates say drivers must read their contracts carefully to make sure there are no surprise costs or fees.

3. Pay-as-you-drive insurance isn't offered everywhere. Each state has an insurance department that must approve this relatively new type of coverage, so the programs aren't offered everywhere. For the states that do have this coverage, only a few insurance companies offer it.  In 2007, GMAC Insurance rolled out its OnStar program in 34 states. Progressive's MyRate is available in only nine states: Alabama, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Missouri, New Jersey and Oregon.  "More are coming," Hutchinson said.
 
The Hartford insurance company recently concluded a six-month, pay-as-you-drive study in Connecticut and is analyzing the results before making a decision on expansion, says Thomas Hambrick, spokesman for The Hartford. "We are excited about the possibilities that vehicle telematics technology can offer." Unigard is testing a pilot program, but only in the state of Washington. "It's still in process," spokesperson Anne M. Smith says.
In California, a bill before the legislature may open the door for drivers there to participate in voluntary mileage-based insurance. The intent is to reduce greenhouse emissions in the state by offering vehicle owners an incentive to drive less. It's a laudable goal, says Holober, the California-based consumer advocate, but he says he still has concerns. For example, drivers of older cars wouldn't be able to receive the lower rates, since their vehicles couldn't use the required technology. "Everyone should have access to the discounts," Holober says.
 
4. A variety of driving data can be collectedIf insurance companies are only concerned with accurately obtaining the number of miles driven on the car, there are ways to do it without the need to install tracking equipment, Holober says.  For example, many states, such as California and New York, already require an emissions test on many cars on a regular basis. "Odometer readings could be collected (during these tests) and sent to insurance companies," he says. However, high-tech data-collection devices could gather much more information. They can detect how fast you accelerate, how fast you brake and the time of day you drive, Holober says. These factors could be considered in your insurance rating, since they tend to reflect whether you're a safe driver.  Progressive's Hutchinson says that the first privacy question he usually receives from drivers is if Progressive is tracking their location, and the next question is whether the company is measuring their speed. The answer to both questions is no, he says."We don't track you with a GPS monitoring system, and we don't monitor your speeding habits," he says.  
 
Customers also want to know what happens to the data that's collected. "We have a privacy statement that's part of our terms and conditions. Consumers can access it on our Web site," Hutchinson says. According to the site, Progressive will not sell personally identifiable MyRate data to third parties. The company also won't use MyRate data to resolve an insurance claim unless it receives permission to do so from the driver or vehicle owner. "We've tried to create this program as a way for people to save on their auto insurance and to be very respectful of individual private data at the same time," he says.
 
While the OnStar program does have a GPS tracking device, O'Donnell says that drivers are only sharing their location information with OnStar as part of its emergency assistance program. "Customers have to be with OnStar first before they can opt in to our low-mileage discount program," O'Donnell says. At that point, the customer allows OnStar to share relevant information with GMAC insurance. Regardless of the insurance company, pay-as-you-drive programs are voluntary, and just as customers opt in to them, they also can opt out by switching to traditional auto policies.
 
5. Exceeding the mileage limit could trigger a surchargeA low mileage insurance program is supposed to save you money, but unwitting drivers actually could receive surcharges if they go over the low-mile limit. For example, under Progressive's MyRate program, rates could go up 9 percent if the driver goes over the limit.
Despite the possibility of an increase, Hutchinson insists there are no surprises.
 
Policyholders can look at their driving data online, view the number of miles they've driven during the policy term and determine if that number qualifies them for a low-mileage discount at their next renewal, he says. With up-to-date access to discount eligibility information, drivers have a chance to adjust their habits before their policy renews. If consumers’ mileage is too high, they shouldn't be surprised if their discount disappears in the next policy term period.  "At the end of the day, what insurance companies want to do is to charge people enough to cover the risk on the policy," says Belden of Insurance.com. "They can more accurately cover this risk if real-life behavior is measured."
 
Most importantly, please contact our agency so that we can help you analyze how new rating parameters can help us manage your personal or business insurance coverage. It’s always best to double check your specific situation and have us evaluate whether you are receiving the appropriate discounts and coverage features.

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