Should You Try Pay-As-You-Drive Insurance?

Getty ImagesBy Geoff Williams

For several years now, car insurance companies have bombarded the nation with television commercials, beseeching consumers to sign up for what is commonly called pay-as-you-drive insurance, although some in the industry prefer the term “usage-based insurance.” You’ll also hear this type of insurance referred to as telematics, which describes the combined use of technology and information.

The idea behind pay-as-you-drive insurance is that if you are as good of a driver as you tell your family and friends, you shouldn’t mind attaching a device to your car — usually to your auto’s onboard diagnostics port — that collects information about how you drive, such as how you hard you brake and whether you tend to have something of a lead foot.

Should you sign up? After all, while these devices were once something of a curiosity, they’re becoming more mainstream. Last year, a LexisNexis Risk Solutions survey of 2,072 U.S. residents found that 1 in 3 consumers are aware of usage-based insurance. And, an industry website, estimates that about a million cars in the United States were using telematics devices at the end of 2012. It projected that by the end of 2013, there would be five million cars using these devices.

For those who have considered installing the gadgetry but have questions, here are some answers.

Who offers pay-as-you-drive insurance? Some of the big players include Progressive (PGR), Allstate and Esurance (ALL), State Farm, Travelers (TRV), the Hartford (HIG), Safeco and GMAC. That said, even if a company offers this insurance, it may not offer it in your state. Each state regulates its own insurance (there is no national standard), and each insurer is navigating each state’s red tape allowing pay-as-you-drive or usage-based insurance to be offered to consumers.

How much do drivers save when they use these devices? Typically, insurers promise consumers that they’ll save anywhere from 20 to 50 percent; just how much depends on your insurer. Some insurers offer an immediate discount, usually 5 or 10 percent, for simply installing the device.

Can a driver lose money by using the device? If a driver can lose money, the insurers don’t mention it in their marketing, and some company spokespeople will flatly say the consumer will not be charged more money, or lose their policy, by using these devices. For instance, Sarah Inciong, the director of the Drivewise program, the usage-based insurance plan for Allstate, says: “The way our program is designed, it’s only to reward people for good driving. The worst that will happen is that someone won’t save much — or anything.”

Tony Hare, product managing director for Travelers, says the same thing — that no discount is the worst-case scenario.

What exactly do these devices measure? It depends on the company, but most measure a car’s speed, the time of day or night that driving is done and the mileage. Some, like Travelers’ IntelliDrive, have a GPS component, in which you can track where you’ve been driving. Some critics have suggested that there’s an ominous Big Brother aspect to this type of tracking, which is why most insurers aren’t utilizing GPS. But proponents see the data, including the GPS information, as a “Big Parent” approach, one that their customer-parents will welcome. For instance, Travelers’ IntelliDrive program can send speeding alerts to the consumer — which can be helpful to know if your kid is out driving the car.

“Many customers use the alerts to help coach their teenage drivers,” Hale says.

Inciong echoes the same sentiment. “A parent can log into the website and show their child, ‘Here are patterns of risky behavior,’ or maybe your teen is a really good driver, and you can show them, ‘You’re doing really well,’ ” Inciong says.

There is a limit to how much information these programs track. For instance, Inciong says, at least with Allstate’s Drivewise program, if you’re driving 10 miles faster than you should be in a 45-mph zone, your device won’t know that.

Allstate’s device only measures whether you’re traveling faster than 80 mph — something to consider if you live in a remote area where the highway signs read 75 mph, and you occasionally creep past 80.

Who will likely benefit the most from these devices? Naturally, insurance companies would like to see every consumer travel with a telematics device, but obviously, there is little incentive for aggressive drivers (you know who you are) to sign up. It also will likely pay off if you don’t practically live in your car. These devices seem tailor-made for consumers who work out of their homes or have short commutes.

That is part of what likely appeals to customers of MetroMile, a startup in San Francisco that charges based on how much you drive, not how you drive. It’s an insurance plan that uses a telematics device and so far is only offered in San Francisco, Oregon and Washington. According to Steve Pretre, the company’s CEO and co-founder, “the Metronome device tracks actual miles driven, and your credit card is charged at the end of the month. If you drive less, you automatically pay less.”

Pretre says his average customer in Oregon saves about $400 a year over what they were paying the year before. “While the national driving average is about 11,000 miles a year, about two-thirds of people drive less than 10,000 miles per year, which is the typical break-even point between MetroMile and a traditional insurance plan,” Pretre says.

“Historically, because there was no way to measure use, insurance companies pooled pricing across drivers. In effect, the people driving less than 10,000 miles per year subsidize the minority of people that drive more,” he says.

Pretre says a lot of his company’s consumers are city dwellers who use public transportation or bike to work but use their cars for errands and recreational activities on the weekend. Many of the company’s customers also telecommute.

“Another interesting profile is seniors, people who are on fixed incomes but don’t drive much,” Pretre says. “We give them the opportunity to have more control over their insurance costs.”

That, of course, is the message insurers want to get out — that consumers can use telematics devices to have more control over reducing their insurance expenses. Consumers, meanwhile, can only hope that the insurers don’t someday use the data to drop policies — or that insurers, especially those with GPS tracking, don’t someday use the information they collect to make negative judgments about you or sell information about your driving habits to a third party.

And, of course, if you’re in a car wreck, your insurer will know the time the accident occurred, how fast you were driving and how hard you braked, assuming there was time to brake. All of that information could work against you — or in your favor. You may benefit from the device, but so does your insurer.

In other words, when it comes to usage-based insurance, you may be behind the wheel, but it isn’t clear who is in the driver’s seat.

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