Using Consumer Driving Behavior to Determine Insurance Rates
Why this might not be such a bad idea after all
You may have seen the recent New York Times article “Automakers Are Sharing Consumers’ Driving Behavior With Insurance Companies”. In the article, they discussed how automakers were sharing data with Lexis Nexis, a risk analytics firm that sells information to insurance companies. This information included trip data and described incidents of hard braking and hard accelerations. In the insurance world, this is called telematics (why? Perhaps a penchant for sounding like 80’s synth bands? No, it’s a combination of the word "tele” - communication and “matics” - how it’s working and making it go -roughly). This is essentially communicating the status of a system, like hard braking in your car.
What stuck out to me was this quote from an outraged insured (that’s insurance-speak for the person who buys insurance):
“It felt like a betrayal,” Mr. Dahl said. “They’re taking information that I didn’t realize was going to be shared and screwing with our insurance.”
I hear you Mr. Dahl. There are a number of privacy concerns and I think the insurers, risk analytics firms, and car manufacturers have not done a particularly good job of being transparent.
However (and here’s the really spicy part), I am personally on board with automakers tracking this data (in transparent ways!), and here is why:
Automakers already use a great deal of data to determine your insurance rates that you don’t know much about and may not have much say in (if you are ever curious, you can request something called your CLUE report). Most people believe it’s your accident history, traffic violation history, car make, and driver age. What it really is is your accident history, age, credit score, traffic violation history, location, gender, car make, and whatever special sauce each insurance company decides to put into their ‘rating methodology’ (insurspeak for how they choose prices). You think having data tracked on how you actually drive is bad…I think having your insurance price decided based on your credit score, marital status, and gender is far more unfair. (So unfair that in some states it’s banned!) Both of these attributes are what insurers use as proxies instead of concrete data about how you drive. They do this because there is some correlation (whether there’s causation is another discussion).
This may seem wildly unfair (and it is in many cases, especially for many minority groups), but insurers need some way to quantify the risk. If they arbitrarily chose premiums, they would rapidly go out of business.
So, insurance companies use data somewhat correlated to the risk, but it is a proxy and therefore fallible. It does not catch edge cases well. Many customers will get caught up in high insurance premium nets that are perfectly safe drivers. Perhaps they have a former spouse that destroyed their credit, perhaps they are better at driving than managing money. Perhaps they are a young man that is incredibly risk-conscious and safe, or a 24-year-old that is extremely mature for their age. Other drivers may pay a lower rate for insurance just because they have a high credit score, live in a certain neighborhood, and can afford to pay out of pocket for some accidents. Meanwhile, they may drive like maniacs.
Insurers would prefer to use better data (they always prefer this). Believe it or not (believe it actually, it’s true), insurers are capped on how much profit they are allowed to make (the degree varies by state). They’d much prefer to charge good drivers lower rates and pay out fewer claims than to charge bad drivers high rates and pay out claims. Think of it this way…
Sally good-driver pays $1200 in premium and never makes a claim in 5 years. Her credit score and driving record are great. The insurance company therefore has $6K ($1200 x 5) from her to invest and pay business running costs etc.
Jared bad-driver has slightly worse credit and a couple of tickets so he pays $1900 in premium. He causes an accident that totals her car in year 4. The company has therefore received $7600 from him, but has had to pay out $30K for a new car + damage to another vehicle. They’ve now LOST money on Jared even though his premium is much higher. Sally is also subsidizing him for his bad driving.
By tracking how you actually drive, they are using a metric that is much more fair and based one what you really do. That’s not to say that automakers, risk analytics firms, and insurers shouldn’t be completely transparent, because they should be.
Optimally, they’d keep Sally good-driver and also add John ‘good-driver but low credit score’ and give Jared an extremely high premium. Or, better yet, convince him to drive better by tracking his driving (with his awareness!).
But there’s another reason to use transparent telematics for pricing insurance—Driving is one of the most dangerous things humans do every day. It is a leading cause of death in the US. There is also a strong correlation between tracking driving and safer driving but drivers must be aware they are being tracked! The real-time feedback of understanding, if they are accelerating too hard, braking too hard, or handling their phone when they shouldn’t be, helps people become better drivers.
Insurance companies would do better to insist on a driving score to provide insurance. By making a driving score a requirement for insurance in lieu of proxy data, insurers would actually solve two major problems: They would have real and therefore fair data, and they would be actively making the roads safer for everyone.
Sources:
Referenced article:
https://www.nytimes.com/2024/03/11/technology/carmakers-driver-tracking-insurance.html
Leading cause of death source:
https://www.cdc.gov/injury/features/global-road-safety/index.html#:~:text=Road%20traffic%20crashes%20are%20a,citizens%20residing%20or%20traveling%20abroad.