The pay-as-you-go (PAYG) car insurance trend shows no sign of slowing down -- more than 70 percent of companies say they plan to offer a PAYG product within the next few years, according to a new study.
PAYG policies, also known as usage-based insurance (UBI), all work in a similar fashion: policyholders let insurers monitor their motoring habits, often by installing a telematics tracking device in their car, to potentially qualify for discounts. Drive safely and log fewer miles, insurers say, and you may save as much as 30 to 40 percent a year.
Progressive's Snapshot program was among the first PAYG products, and other companies have begun offering similar products over the past two years. Those that don't already offer PAYG policies will likely play catch-up in the coming months and years, says Mark Breading, a partner at the research firm Strategy Meets Action (SMA) who co-wrote the report with analyst Richard Welch.
"The idea of usage-based insurance for personal auto insurance is just starting to gain some visibility with consumers in North America," Breading says. "While there may not be lots of new programs in the market in 2013, many insurers are putting plans in place. Over the next five to 10 years, usage-based insurance is expected to transform the auto insurance market."
Insurers, however, could face a challenge convincing motorists. Most firms polled by SMA said only 1 percent of their clients are currently enrolled in a PAYG plan, and that they expect the number to climb to nearly 5 percent by the end of 2014. But that could all change as PAYG becomes more familiar over time -- SMA says insurers believe that PAYG could capture about 20 percent of the consumer market by 2020. (See: "As economy sinks, pay-as-you-go insurance soars.")
Factors considered by car insurance companies when giving PAYG car insurance discounts
SMA's research, based on surveys and interviews with several companies in late 2012, also helps to clarify just what insurers consider most relevant when analyzing driving data. Miles driven was at the top of the list, with 71 percent of insurers saying they would use it to determine if a discount would be offered. Here are the other prime factors, according to the report:
- Time of day or night the vehicle is driven -- 50 percent of insurers would use the data
- Braking habits -- 46 percent
- Vehicle speeds -- 46 percent
- Acceleration habits --38 percent
- Sharp turns -- 31 percent
Insurers also consider regular driving routes and where the car is parked during the discount process, according to SMA.
Not everyone comfortable with PAYG auto insurance
Privacy advocates, including the influential Electronic Privacy Information Center (EPIC), worry how the gathered details could ultimately be used, perhaps by advertisers or in criminal investigations. And academics and social scientists have also weighed in, among them Anita Ramasastry, a law professor at the University of Washington who has studied PAYG models.
She cautions that the gathered information, if not adequately controlled, might even affect the workplace if insurers were willing to give driving profiles to employers.
"The fact that someone drives a lot late at night, for example, may be interpreted by an employer as a sign that he is not going to stay awake or alert at work, or that he is a late-night partygoer," she says.
Other industry watchers have speculated that though PAYG data may not be used by insurers to increase premiums, eventually they may use it when considering whether to renew policies. Progressive has said through a spokesperson that it has no plans to use PAYG data when reviewing policy renewals "at this time."
Insurers, however, claim they protect policyholders' privacy and any concerns are overblown.
A look at the pay-as-you-go car insurance landscape
Here's what four of the major plans offer:
- Progressive's Snapshot: The way Snapshot works is typical -- you plug in the device, which then tracks time of day you drive, how far, and how often you brake hard. Richard Hutchinson, the company's general manager of usage-based insurance, says savings could reach 30 percent for the most conscientious motorists. He adds that it's best if your car stays parked during peak accident hours (between midnight and 4 a.m.). The device must be installed for at least 30 days to generate a driving profile. Snapshot can now be tried for 30 days without being a Progressive customer.
- State Farm's Drive Safe & Save and In-Drive: Drive Safe & Save requires an OnStar subscription. State Farm receives odometer readings from OnStar every 30 days and, after six months, adjusts your premium to reflect the mileage. The company says discounts usually begin at 10 percent but can go higher. The insurer also offers In-Drive, which requires a plug-in to track driving details. State Farms says discounts can reach 30 percent.
- Allstate's Drive Wise: A plug-in device records the usual motoring statistics, which can lead to a 10 percent discount for the first policy term. According to the company website, you can save by having low miles, driving safe speeds, during safe hours and avoiding hard stops. If drivers maintain safe motoring habits and low mileage during subsequent terms, savings can go as high as 30 percent, the company says.
- The Hartford's TrueLane: This is offered in Connecticut, Minnesota, Missouri, Oregon and West Virginia, with plans for expansion. A plug-in device records relevant motoring information and transmits it to the insurer by its partner, Octo USA Inc., over that firm's cellular network. According to Hartford's Truelane site, the device records the time of day you're driving, speed and location and that's used to calculate trip distance, trip duration, acceleration and braking. You get a 5 percent discount by enrolling. After driving for 75 days, your premium could drop by as much as 25 percent, depending on how safe you are.