The pros and cons of telematics-based car insurance

There’s a new way to save big money on your car insurance premium. Telematics-based auto insurance plans, or ““pay as you drive” plans, are rapidly rising in popularity in the U.S.

So how does it work? What you pay is based on how many miles you drive, what speed you drive at and what kind of driving habits you have. This information is read and stored by telematics devices, which plug into cars’ diagnostic ports to monitor drivers’ mileage, speed and driving habits – and then that information is then passed on to your insurer.

Traditional insurance plans rate drivers are based on the following factors:

• The number of miles you drive.
• Your accident history.
• Your credit score.
• Your demographic data — for example, if you’re an unmarried male teen, you’ll likely pay higher car insurance rates than a 45-year-old married man.

In comparison, telematics-based plans take a driver’s actual mileage and driving habits into account in determining rates. Under such plans, “policyholders who tend to drive at less risky times of the day and whose driving habits reflect an awareness of road safety receive a lower rate,” says Loretta Worters, spokeswoman for the nonprofit Insurance Information Institute.

Although such plans are more common in Europe than in the United States, analysts anticipate that U.S. demand for such insurance technology will rise substantially in the coming years: The business consulting firm Frost & Sullivan predicts that more than 1.1 million American consumers will make the switch to usage-based insurance (UBI) plans by 2017.

Telematics-based insurance plans may already be on your radar — so what should you know about the technology before making the switch? Here’s a look at some of the pros and cons.

The pros and cons of telematics

Pro: Telematics-based plans result in lower insurance rates for people who drive less frequently.

Usage-based insurance plans can be ideal for people who drive fewer than 10,000 miles per year. For example, a standard premium rate for a Subaru Impreza WRX sedan under a typical car insurance policy would average $1,548 annually, or $129 per month, according to MSN Money. However, a usage-based plan for a similar vehicle purchased through MetroMile, an Oregon-based startup that offers its own telematics-based insurance policies, would cost just $32.24 per month plus 4.2 cents per mile. That means if you only average 500 miles of driving each month, your monthly rate would be $53.24 — less than half of a typical premium cost.

Con: Rates could potentially go up for drivers who practice unsafe driving habits.

Currently, all insurance companies offering telematics-based plans are offering them on a “discount-only” basis, encouraging consumers to use the devices as a trial. If they don’t get a discount, they aren’t likely to switch. However, there is no guarantee this practice will remain standard indefinitely. At a presentation in May 2013, a Progressive representative told investors and analysts that it is an “open question” if such plans will remain discount-only, so in the future, drivers with poor habits who use telematics may be charged more for their insurance. 

Pro: Monitoring may help improve driving habits.

Although drivers’ accident records have always come into play in determining the rates they pay for insurance, many experts believe telematics can be far more effective in helping drivers to modify their habits. According to Worters, many experts believe that because monitoring provides immediate feedback on your driving behaviors, it may influence drivers to modify their poor driving habits.

So far, some studies support this prediction: In a pilot telematics program among commercial fleets in the United Kingdom, PepsiCo reduced its crash rates by 80 percent.

Con: Telematics data collection could lead to privacy violations.

Telematics devices collect extensive amounts of data on customers’ driving habits, and some fear this data could be used against them. In fact, according to Progressive’s CEO Glenn Renwick, 40 percent of the company’s customer base refuses to try Progressive’s Snapshot pay-as-you-drive insurance plan because of privacy concerns. Several insurers, including Allstate, State Farm and Progressive, say they will turn their policyholders’ data over to law enforcement officials if requested, but all claim that they don’t track drivers’ specific locations.

According to Dorothy Clancy, a professor at Santa Clara Law School who specializes in transportation-related privacy issues, companies are only allowed to track drivers’ locations for purposes related to emergency road service program, theft-tracking service, map service or travel services. Nonetheless, data related to customers’ driving habits or time behind the wheel could be passed on to legal authorities in some cases.

Should you switch to a telematics car insurance plan?

So is a “pay-as-you-drive” car insurance plan a good option for you? If you drive safely and don’t put too many miles on your car each month, chances are good you’ll save money with such a plan. It could be an even better option for teenage drivers in your household who have good driving habits and would otherwise be subject to higher rates.

If you’re concerned about how your insurance company will use your data, speak with a representative in detail about how information is collected and in what circumstances it can be shared or used before deciding whether to join the program.

And if you feel comfortable with it, there’s a good chance that a usage-based insurance plan could help you save money — and may even make you a better driver.

Shopping for car insurance? Get a free insurance quote today!