Plans Cut Rates for Drivers Who Use Devices That Track Their Habits at the Wheel
For years, drivers paid less for auto insurance if they reported low mileage. Now, insurers are using high-tech devices to track customers' habits, and offering deep discounts to those who not only drive less, but also cautiously.
In the U.S., Progressive Corp. and GMAC Insurance, a unit of GMAC Financial Services, are the first and the largest companies to roll out this type of plan. At least two smaller companies, including Unigard Insurance Co. of Bellevue, Wash., a unit of QBE Insurance Group of Australia, also are poised to start similar ones soon. Companies in Canada and Italy also have programs, and Hartford Financial Services Group Inc. is testing the same technology in Connecticut.
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Drivers who participate in these plans have devices installed in their cars that, depending on the technology used, can track the number of miles driven, the speed at which cars are driven and even how often and how hard the brakes are used. By allowing their habits behind the wheel to be monitored, drivers get lower insurance rates -- or pay higher premiums if they're lead-footed road hogs.
Usage-based insurance pricing would mean an estimated two-thirds of households would pay less in premiums than they do now, according to a report by the Hamilton Project at the Brookings Institution, a think tank. Researchers Jason Bordoff and Pascal Noel calculated average savings at about $270 per car, per year. Some analysts and insurers believe that after a slow start, usage-based insurance could take off now that higher gas prices are forcing consumers to drive less anyway.
Proponents of these plans say they also have the potential to help ease traffic tie-ups and reduce carbon emissions by rewarding customers for driving less. Fewer miles on the road also means fewer accidents -- and fewer claims for insurers. With pay-as-you-drive insurance, drivers in the U.S. would reduce their mileage by about 8%, with $51.5 billion in social benefits mostly from reduced congestion and accidents, according to the Hamilton Project.
Later this month, Progressive says it will re-launch and expand its program, formerly known as "TripSense." Currently available only in Michigan, Minnesota and Oregon, TripSense subscribers get a special device that plugs into their car's diagnostic port -- the place mechanics plug into when troubleshooting. The Progressive device, however, keeps track of when, how far, and at what speed the car is driven. Every six months, drivers must remove the device and upload stored information to a computer and send it to the company.
When Progressive's new usage-based program, known as "MyRate," is launched, the technology will require less driver effort. This program uses a telematic device, which gathers driver data and wirelessly transmits it over a cellphone network. Progressive says it will also track how often and how hard drivers brake and use the braking information when calculating rates. This system doesn't include a global positioning system, so it won't track a driver's whereabouts. Drivers get back a periodic report that tells them how many miles they've logged and other feedback about their driving habits. Based on the data, they'll receive discounts ranging as high as 60%, depending on the state.
But the device could raise rates for some drivers. In some states where it's permitted by law, drivers would be assessed a 9% surcharge for logging excessive miles or driving at high speeds with hard braking, said Richard Hutchinson, a general manager for Progressive.
Progressive, which has 7.1 million auto policies in force nationally, says 34% of its customers in Michigan, Minnesota and Oregon who signed up via telephone or Internet (instead of their agent) have been choosing the usage-based programs since 2004. The new plan is expected to be available in six more states by the end of this year and will also be sold by independent agents, the company said.
Brandon Biniecki, a 23-year-old information-technology support technician in Monroe, Mich., says he signed up for Progressive's usage-based program in 2006 for his Chevy Cobalt, a compact car. He drives less than 18,000 miles a year and currently receives a 5% or 10% discount from the company every six months, he says. Mr. Biniecki says he doesn't mind being monitored in return for saving money, but admits he might not have signed up if a global positioning system, or GPS, was involved.
"That would be an invasion of privacy, with someone being able to know where I am at any given point in time," he says.
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Other insurers include GPS in their monitoring devices. GMAC Insurance's Low-Mileage Discount Program with OnStar, which expanded to a total of 34 states last year, grants discounts to users of vehicles equipped with GM's GPS and communication systems. The company says that enrollments have increased 200% since last year, and that customer retention rates are higher for those using the device.
In order to receive a discount, the driver must subscribe to OnStar, which is generally free for the first 12 months to buyers of new GM cars, and costs $199 to $299 annually after that. New customers who agree to have odometer readings sent directly to GMAC Insurance will earn a 26% discount if they drive less than 15,000 miles annually. (Existing drivers earn discounts based on their actual mileage.) Even heavy drivers can still earn a 5% to 8% "safe driver" discount just for subscribing to the service. Low-mileage discounts increase in tiers as fewer miles are logged. For instance, someone who drives less than 2,500 miles a year can qualify for a 54% discount.
'I Didn't Believe It'
Don West, 74, a real-estate broker in Gresham, Ore., says he reluctantly switched his coverage to GMAC Insurance, leaving his longtime agent, a personal friend. Because he and his wife drove less than a combined 15,000 miles a year, their rate plummeted. Says Mr. West: "I was paying $2,000 a year in premiums for the Cadillac and the Hummer, and it dropped the premium the first year I was on GMAC to $886 dollars. I didn't believe it at first."
About 20,000 drivers currently participate in the GMAC low-mileage program with OnStar, says John O'Donnell, vice president of business development at GMAC Insurance, out of five million OnStar clients.
At this point, OnStar only relays odometer readings to GMAC Insurance, Mr. O'Donnell said. OnStar doesn't continuously track drivers' location and only pinpoints a car's whereabouts at certain times -- when the device is activated by a crash or the police receive a stolen-vehicle report, for example. "There is an opportunity to get other information, and as we do we will be able to correlate risk to actual driving behavior itself rather than more predictive factors," Mr. O'Donnell says.
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