A New Way to Charge for Auto Insurance: The Company Watches you Drive

December 14, 2015

For decades, insurance companies have considered drivers' histories when they calculated auto insurance premiums. They have based prices on a driver's age, record of accidents and traffic tickets, and how long she's been driving. Factors such as gender, marital status, and school grades have also been important.


A new way of pricing auto insurance is taking hold, however. It is called usage-based insurance, though it also goes by "pay as you drive" or "mile-based insurance." Instead of looking at how the driver has performed in the past, this method looks at what the driver is doing now.


All usage-based insurance programs involve the driver reporting information to the insurance company. The most common method uses a technology called "telematics". A telematics system requires the driver to install a device in the vehicle's computer port. The device wirelessly transmits information about the vehicle's use to the insurance company.


The insurance company determines what information it wants. Some may want only the number of miles driven. Others may want that plus information on speed, braking, time of day, and even destinations. The company calculates the driver's premium based on the information gathered. Those who drive safely or less frequently pay lower premiums than those who do the opposite.


Usage-based insurance offers a number of potential benefits:


  • Careful drivers can reduce their insurance costs
  • Insurance companies can more accurately price their products
  • Consumers have more insurance choices
  • Drivers have an incentive to drive more safely
  • Younger drivers may pay less for insurance than they would otherwise
  • It encourages safer driving
  • It discourages unnecessary driving

However, the system has some important flaws.


  • It may penalize drivers who speed, even though that may be the safest way to drive at a particular time. Conversely, it may reward those who drive too slowly for traffic conditions.
  • A distance-based system may not distinguish between city, highway and rural driving, even though the risks of accidents vary widely among them.
  • It does not capture habits that affect the risk of accidents, such as sudden lane changes without signaling, tail-gating, and talking on the phone.
  • It presents privacy concerns. The insurance company may obtain data on how far, when, how fast, and the destinations where customers drive.

A 2015 report by Visiongain projected that 21.7 million policyholders would have usage-based insurance that year, up 9.5 million from 2014. Progressive Insurance Company has been the most prominent U.S. company promoting a telematics program, which it calls SnapShot. However, several other companies, including Allstate, Liberty Mutual and National General, have introduced it for either personal or business customers.


Metromile, a California-based company, offers insurance buyers a fixed based rate per month plus a charge of a few cents per mile. The per-mile rate varies, depending on risk factors traditionally considered (age, gender, etc.).


As the various technologies develop and improve, more insurance companies will likely adopt them. They will use the promise of premium discounts to tempt customers to use them. At some point, usage-based insurance may become the norm for insurance buyers, rather than the exception.


Click here to return to Amity Insurance E-Newsletter December 14, 2015.