A few weeks ago, when I borrowed by sister\u2019s car, she warned me to not make any short stops. Her insurance provider was tracking her driving, and frequently hitting the breaks too hard would disqualify her from potential premium discounts.<\/p>\n
In 2015, Progressive Insurance, the fourth-largest U.S. auto insurer, rolled out a new voluntary \u201cPay as You Drive\u201d program which gives drivers the chance to lower their premiums based on analysis of their driving habits. Drivers who opt-in to the program receive a device to plug into their car. Progressive monitors driving and assigns customized insurance rates based on driving behavior. Safe drivers will receive a discount, while more reckless drivers could see an increase in their premium. Of those who choose to plug the device, Progressive estimates that \u201cnearly eight out of 10 drivers save\u201d with average saving of 10-15%.1<\/sup><\/p>\n The Progressive Snapshot device is a small module that is plugged into your car\u2019s On-Board Diagnostics Type 2 (OBD-II) port. Like a black box on an airplane, the OBD-II allows automotive technicians to diagnose vehicle activities. Inside this 2\u201dx3\u201d device is a memory chip, cellular radio, and GPS radio that can track location. The Snapshot continuously streams data wirelessly, via AT&T\u2019s network, to Progressive while you drive. \u00a0Progressive records the number of miles driven, time of day, and how often the driver makes sudden stops.<\/p>\n While car insurance requirements vary by state, drivers must always prove ability to pay damages in the event of an accident. The most common type of insurance is liability insurance, which covers damages when you are at fault.2<\/sup> Providers calculate a driver\u2019s likelihood of making a claim and base the premium on the perceived level of risk. Providers historically bucketed drivers in broad actuarial categories to supplement limited driving records. Certain factors statistically increase your chances of getting into an accident, and providers use these factors to determine your premiums.2<\/sup> Traditional factors include age, gender, occupation, vehicle\u2019s make and model, and credit history. The Internet of Things (IoT) has created new opportunities for providers to better estimate risk based on driving and price accordingly. Because good drivers will shop around for the lowest rate, this program results in increased premiums (by attracting more drivers), reduced loss ratios (by attracting better drivers) and improved margins. The program has also encouraged safer driving behavior.<\/p>\n Despite the potential for savings, only 25% of customers have opted-in. Some customers choose not to participate because of the lack of privacy. Progressive discloses that they currently track vehicle speed, but not location. Smartphones have made Americans more comfortable with location-tracking, so the company \u201cis once again researching GPS use, including in some of its Snapshot devices.\u201d3<\/sup> Other customers opt out because it gives Progressive the ability to use data against them in a future claim. If a driver was speeding at the time of an accident, the data could adversely impact his claim or future premiums. Additionally, security remains a big concern for IoT-enabled devices.<\/p>\n Turning this data into usable insights will require larger and more sophisticated IT departments, investments in data warehousing, and data analytics teams to interpret the data. Going forward, Progressive will need to think about what additional data to gather and how to best use it. More detailed monitoring may be imminent. Allstate was awarded a patent last year for cameras to record \u201cpotential sources of driver distraction within the vehicle\u201d such as pets and phone usage, as well as sensors for alcohol and loud noises.3<\/sup> Overlaying GPS location tracking with a map of speed limits would allow providers to know when the driver is speeding. While this data could help Progressive make premium adjustments, should it be used by authorities to issue traffic tickets? Currently, Progressive will turn over data with court orders.<\/p>\n I believe insurance providers will eventually require all drivers to participate in usage-based insurance.\u00a0 Progressive partnered with General Motors to install a built-in device in all new vehicles. Customers can decide if they want to share the data with Progressive. A mobile version of the Snapshot system is also in the works.\u00a0 This raises an important question of who owns the data. If it is the driver, they should be able to \u201cshop\u201d their scores to other providers, which could threaten Progressive\u2019s competitive advantage built by offering the Snapshot program. Progressive is not the only auto insurer using IoT; Allstate has developed a smartphone application to monitor driving habits, and Nationwide has a similar program.<\/p>\n IoT has helped Progressive improve its operating model, but a larger threat to its business model is on the horizon. The impending reality of driverless cars may make auto insurance providers obsolete, as individual drivers will no longer require coverage. Progressive will need to evaluate how it pivots from personal car insurance to product-liability and coverage bought by ride-sharing businesses.<\/p>\n As for my sister, she is removing the device. Her premium savings amounted to $0.<\/p>\n (796 words)<\/p>\n Sources:<\/p>\n [1] Progressive News Release. https:\/\/www.progressive.com\/newsroom\/article\/2015\/may\/safer-drivers-pay-less-for-car-insurance-with-snapshot\/<\/a><\/p>\n [2] Department of Motor Vehicles. \u201cHow Car Insurance Works,\u201d http:\/\/www.dmv.org\/insurance\/how-car-insurance-works.php<\/a><\/p>\n [3] Scism, Leslie. \u201cCar Insurers Find Tracking Devices Are a Tough Sell\u201d Jan. 10, 2016,<\/p>\n http:\/\/www.wsj.com\/articles\/car-insurers-find-tracking-devices-are-a-tough-sell-1452476714<\/a><\/p>\n [4] Progressive News Release. https:\/\/www.progressive.com\/newsroom\/article\/2015\/may\/safer-drivers-pay-less-for-car-insurance-with-snapshot\/<\/a><\/p>\n [5] Meola, Andrew. \u201cHow the Internet of Things will affect security & privacy\u201d Aug. 24, 2016, http:\/\/www.businessinsider.com\/internet-of-things-security-privacy-2016-8<\/a><\/p>\n [6] O\u2019Connor, Amy. \u201cGM\u2019s OnStar Ready to Offer Progressive\u2019s Usage-Based Insurance\u201d February 4, 2015, http:\/\/www.insurancejournal.com\/news\/national\/2015\/02\/04\/356387.htm<\/a><\/p>\n