Auto insurers hitch a virtual ride with pay-as-you-go customers

Photo: Chuck Coker

Ordinarily, drivers pay for insurance based on generalizations about age, gender, marital status, and where they live. So, if you’re a teen driver, a young unmarried male, or another “risky” demographic, your premiums are likely to be high regardless of how often (or how well) you drive.

But what if you could pay for insurance based on your actual driving habits rather than assumptions? With rising gas costs, wouldn’t you want to drive less and save money at the pump and on your insurance policy?

Insurance companies have been experimenting with voluntary pay-as-you-drive plans for years, and several have recently introduced higher-tech versions, among them Progressive’s Snapshot (available in 33 states) and State Farm’s Drive Safe & Save (currently available only to OnStar customers in Ohio, California, Texas, and Illinois).

“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,” Loretta L. Worters, vice president of the Insurance Information Institute.

Traditional insurance policies factor in your estimated mileage and safety record, but Worters says some drivers over or underestimate their annual mileage. Pay-as-you-drive programs actually track mileage and, in some cases, other information to offer discounts based on this driving data.

For instance, participants in Progressive’s Snapshot program install a small gadget called Snapshot near the steering wheel. Snapshot records data on when and how they drive, sends the data to Progressive, and after 30 days, customers find out if they’re eligible for a discount based on that 30-day “snapshot” of their driving habits. Snapshot tracks the time of day, mileage, and how often the driver slams on the brakes but not GPS location or speed.

“Because we determine a driver’s premium based on a mix of all these factors together, the Snapshot Discount is not based on any specific number of miles or instances of hard braking or driving late at night,” says Progressive spokesperson Brittany Senary. “People who drive safely, primarily during daytime hours, are most likely to get a discount.”

Savings average around $150 a year

Discounts can go as high as 30 percent, but the average savings is around 10-15 percent, which translates to savings of $150 per year on average. Drivers’ rates cannot increase with Snapshot.

State Farm’s Drive Safe & Save program only tracks mileage using OnStar vehicle diagnostics to report odometer readings. After at least 100 days of odometer readings, the annual mileage is calculated to determine the customer’s mileage-based discount, which is applied at the customer’s first policy renewal date. “The theory is if you drive more, through the law of averages, there’s a greater chance that you could be involved in a wreck of some kind,” explains State Farm Insurance spokesperson Kip Diggs.

Because of regulatory issues, discounts vary from state to state, and State Farm plans to gradually introduce the program in more states. In Texas, for instance, where the program was introduced last week, discounts range from 1 to 30 percent, with the highest savings for drivers whose annual mileage is around 500. However, if you drive long distances to work each day or take frequent road trips, your discount will be less dramatic. In fact, Diggs says the average driver’s mileage is between 12 and 15 thousand miles per year, which in Texas would mean a savings of about 3 to 5 percent.

Concerns about privacy and higher premiums

Privacy advocates worry that monitoring drivers’ habits is too intrusive, but insurers are quick to point out that these programs are voluntary and that drivers choose to participate because they want to save money. According to Senary, “countrywide, more than a quarter of a million drivers have participated in the [Snapshot] program. About one in four drivers who are eligible choose to sign up.”

Another potential barrier is the variable vs. fixed cost argument, especially if there’s a possibility of higher premiums (which is not the case with Snapshot; however, some State Farm customers who’ve underestimated their mileage may wind up in a higher tier or premiums). “Part of it is weighing the potential discount vs. me not knowing what I’ll be paying at the end of the year,” says John Canali, a senior automotive analyst with Boston-based Strategic Analytics, Inc.

Plus, hardware means an added expense to the customer or the insurer. “If companies are absorbing the cost of the hardware, that puts some boundaries on what they can offer to consumers,” adds Canali. In the case of State Farm, the program is only available to customers whose vehicles are already equipped with the OnStar device.

Despite these concerns, Worters says it’s an emerging trend that’s driven by cost-conscious drivers, safety-conscious insurers, and cities interested in cutting traffic congestion.

Canali points to telematics companies in Europe that are taking driver tracking even further. “It tracks how you drive and helps enable stolen vehicle tracking, things that potentially will get consumers thinking not just about what it saves them but what it adds to their quality of driving,” he explains. “I believe that they’re searching around the US, so we may see this in the future.”

Susan Johnston is a Boston-based freelance writer who covers business and lifestyle topics.