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You're cruising down the boulevard without a care in the world, when a driver in front of you jams on his brakes to avoid running over a gum wrapper and almost ends up with your bumper in his back seat.
Sure, you're a safe driver, but doesn't it sometimes feel like you're surrounded by people who haven't got a clue? The sad fact is that, for insurance purposes, you're most likely pooled with a lot of those bad drivers, and your premium reflects their bad judgments. But that may soon change, as the industry is dipping its toe into the water of pay-as-you-drive insurance, also known as usage-based insurance.
Pay-as-you-drive is simliar to the cell phone world's pay-as-you-go plan and is based on a simple concept. If the insurance company could measure your individual driving habits, it could estimate your risk far more precisely and set your premium rate accordingly. By knowing how many miles you drive a month; how fast you drive; how often you brake hard; and what hours of the day you drive, insurance companies may be able to adjust your rates.
The industry claims that sharing this information with them can save you money. However, it really depends on your actual driving habits. (We know a few folks who are rather nonchalant about their "good" driving habits.) According to a study by Allstate, 64% of those surveyed consider themselves excellent or very good drivers. Yet 89% admit to speeding; 40% have sped at least 20mph above the posted speed limit; 34% have sent a text or e-mail while driving and the worst: 15% of drivers admit to driving drunk.
Those surveyed don't think much of their friends' driving, either, rating only 29% as very good or excellent; 81% rate teen drivers (even those fresh from driving school) as average or poor drivers. And 7 out of 10 people surveyed called senior citizens's bad drivers, as well. While we think quite highly of our own driving ability, we'd be remiss if we thought everyone else was just as good driver.
Typically insurance companies set rates for their customers by lumping them into pools of people who share similar characteristics, for which they have extensive historical data to base their rates. If you're 16, you're lumped with other teens and their known risk. The zip code where you live can impact your premium, as can the model of car you drive, your sex, your education, even your credit rating.
Yet the weakness in this method is that it overlooks individual drivers' actual operational ability and instead focuses only on the ability of other people who resemble them in some ways. Essentially, if you really are an excellent driver, part of your premium already goes to cover the costs of people that resemble you demographically, but who are not good drivers. But pay-as-you-drive insurance policies seek to remedy this.
Pay-as-you-drive premiums start with utilizing the technology already present in cars. Since 1996, cars have become computerized to various degrees, and it is now possible for a company to install a small device into a car's data port that tracks and transmits telematics (data about your car) back to the insurance company. GM cars equipped with OnStar can use that system in a similar way.
The industry leader in the move to pay-as-you-go insurance is Progressive Insurance. To date, its program is available in 43 states and the company claims over 900,000 customers are using it, saving an average of $150 per year. Its ads have likely helped its popularity as they illustrate the ease with which insurance data collection occurs. The Snapshot device plug easily into your car's data port. And that's it.
The device does all the tracking. It'll monitor how hard you brake, how many miles you drive, and how often you drive between midnight and 4 am. Why these data points? They represent common risks in automobile insurance policies. Hard braking indicates aggressive driving, or driving in unusually heavy (hence risky) traffic. High miles increase risk, obviously. And driving during in the hours before dawn increases the propensity for accidents; there are fewer cars on the road, but the percent that end up in an accident are higher than during other times.
GMAC also offers a pay-as-you-drive program in 35 states. It captures only miles driven using OnStar and reports this info to a central hub. Allstate is also getting into the business with its Drivewise program, currently only available in 10 states. It differs from Progressive in that it captures speeds driven, so a lead-footed driver should steer clear of this program.
For all the millions of drivers in America, there are only three companies in the pay-as-you-go business for a few reasons. The technology is expensive, and since no one has a history of this data on which to base premiums, coming up with a premium schedule is something of an act of faith. As the industry gains experience, expect most companies to have such technology available. Pay-as-you-drive insurance is only the beginning of a sea change in how insurance is priced. Like Santa Claus, the companies will know when you've been sleeping, when you're awake, and they'll know if you've been good or bad ... and your bill will show it.