When Peggy Coleman’s insurance agent told her about a new way to save money on car insurance, she knew she had to try it. The solution, called Milewise by Allstate, allowed her to pay only for the insurance she used, thanks to an emerging technology called vehicle telematics.
But there was a catch: Coleman agreed to install a small device in the onboard diagnostic port of her 2015 VW Bug to qualify for the discount. It would track her miles driven, speed, time of day, and specific driving events like sudden braking.
“The cost of auto insurance was considerably less on Milewise compared with a standard policy,” says Coleman, a sales manager from Tucson, Ariz.
Before Milewise, she paid $1,750 per year to insure her car. The program — plus her careful driving — brought that rate down to $1,056 per year, a 49% savings.
Sometimes, the savings are automatic. When you enroll in COUNTRY Financial’s new DriverIQ program, a telematics tool that uses your smartphone, you receive a 10% discount for each vehicle for which you’re listed as the driver on the policy. Driving behavior, tracked and displayed through the company’s DriverIQ dashboard, gives you an additional discount of between 1% and 25% at each six-month policy renewal.
“Data monitored by the app’s smartphone sensors — privately shared between client and COUNTRY Financial only — includes acceleration, braking, cornering, phone distraction while driving, and speeding,” notes Felipe Teixeira, director of national auto product at COUNTRY Financial.
Why everyone’s talking about usage-based auto insurance
Usage-based car insurance is hot. With more Americans taking road trips instead of flying during the pandemic, they’re paying closer attention than ever to auto insurance policies. (The top question: What happens when you take a long trip? Fortunately, pay-per-mile programs are capped, so you don’t end up with a huge bill.)
In a LexisNexis Usage-Based Insurance study, almost 9 in 10 drivers (88%) said they prefer auto insurance pricing based on their actual driving habits. Also, another 71% of drivers noted that they think telematics, including driving behavior data, are among the fairest ways to set a price for the insurance if they perceive a benefit.
“There’s a broad interest from consumers to participate in usage-based insurance programs, and the growing number of connected vehicles only adds to this interest,” says Adam Hudson, vice president` of connected car at LexisNexis Risk Solutions.
But how do vehicle telematics work, and what does “pay as you go” mean? What happens when an insurance company is looking over your shoulder when you’re at the wheel? Turns out this new technology can offer benefits to both the driver and the environment. But as with any new technology, there’s a cost to using it.
What are telematics and pay-as-you-go insurance?
Allstate’s program is part of a new breed of insurance programs that use vehicle telematics to create pay-as-you-go insurance policies. They include Progressive Snapshot, State Farm Drive Safe & Save and Nationwide SmartRide. On average, consumers can save anywhere between 5% and 50% on insurance using pay-as-you-go insurance.
The ideas behind these programs are tantalizingly simple: What if you could only pay for the insurance you use? What if an insurance company could reduce your premiums by verifying your good driving habits in real time?
“Telematics has disrupted the automotive insurance industry by providing insurers with customers’ real-time personalized data,” says Stan Caldwell, executive director of Traffic21 Institute at Carnegie Mellon University. He says insurers can now assess risk by a driver’s actual behavior rather than the demographic and geographic averages of many drivers.
“Customers who actually drive fewer miles and drive more safely than the average driver can save money,” he adds.
“Big brother” questions
So how did it feel to have a bug in Coleman’s Bug?
“At first, I was concerned — like Big Brother is tracking you,” she says.
But after she switched to Milewise, she saw how Allstate was collecting and using her data via its website. She could see that it tracked her speed, whether she stopped quickly and whether she drove after 11 p.m. She could also see her car health overview through the website, including engine alerts, open recalls, and location.
After seeing how the program works, she says the benefits outweigh the privacy concerns.
“Plus,” she adds, “our phones track us anyway.”
Allstate says transparency has helped allay the privacy worries of customers like Coleman. Its smartphone app gives drivers information about their car and driving habits that they find helpful — and generally don’t mind sharing with an insurance company. The company also says it never shares personally identifiable information without customer consent.
In states where Milewise and its safe driving Drivewise program are available, close to 40% of its new customers are enrolling in connected plans. That’s a twofold increase over what the company was seeing at the start of the pandemic.
“More and more people are starting to understand what telematics is and how it can benefit them,” says David MacInnis, Allstate vice president of Telematics and Usage-Based Insurance. “This is especially important now that driving habits have changed for so many people during the pandemic.”
The benefits of telematics explained
Insurance companies don’t advertise usage-based insurance programs that rely on vehicle telematics as a one-size-fits-all solution, says Mary Boyd, CEO of Plymouth Rock Assurance.
“The real benefit to telematics and usage-based driving is the reduction of claims for safe drivers and therefore the costs associated with claims,” she says.
Boyd says before telematics, drivers had a “set it and forget it” mindset. In other words, people pay for their insurance and never think about it. But now that your insurance company can reward you for how you are driving, it’s become a more hands-on experience. And they can even turn the whole process into a game, a process referred to as gamification.
“With telematics, for example, there is a gamification aspect that gives drivers the opportunity to strive for the best to achieve rewards like discounted premiums or monetary rewards,” she adds. For example, Plymouth Rock’s telematics program lets users choose a family sharing option. It not only allows parents to monitor teens and young drivers but also lets up to 10 family members compete for streaks, badges and a spot on the leaderboard for top drivers.
Now, there’s a video game any parent can endorse.
Of course, telematics and pay-per-mile programs aren’t for everyone. If you’ve had a few accidents — or a reputation as a lead-footed driver — then you might not want your insurance company looking over your shoulder. And if you do care about privacy (you carry a Blackphone and refuse to use Google), then these programs are definitely not for you.
The economics behind pay-per-mile programs
Experts say pay-per-mile auto insurance policies have the potential to do more than help individual drivers. They can help drivers as a group.
“Under more traditional auto insurance policies, safe and low-mileage drivers to an extent subsidize high-mileage and dangerous drivers because insurance companies are unable to observe this important information,” explains Cody Nehiba, an assistant professor at Louisiana State University’s Research Center for Energy Studies.
Instead, a pay-per-mile policy charges drivers for each mile, providing an incentive for people to drive less.
“This reduction in driving could alleviate some transportation issues like pollution, congestion, and accidents,” he adds. “Including a telematic device allows those per-mile insurance costs to also vary based on driving metrics, providing an additional incentive for driving safely. This incentive may make individuals speed less and be more cautious — again, reducing pollution and accidents.”
In other words, telematics devices and the corresponding pay-per-mile programs will help safe and low-mileage drivers save money today. But they could also save some money for drivers as a group and potentially reduce pollution.
The savings come at a price
Brogan Woodburn, who covers auto insurance for the car site Detroit Bureau, says he’s saved money using Progressive’s Snapshot program. His insurance rates fell from $120 per month to $65.
“My rate was almost cut in half,” he says.
But he says results may vary.
“Bear in mind that I work from home and drive only a few hundred miles per month,” he says. “I had a good safe driving score overall, but I think most of the discount was based on how little I drove.”
Woodburn has compared multiple telematics programs and found that mileage is an essential ranking factor in most of them.
“With some programs, it can be hard for a driver to get a discount if they have a long commute, no matter how safely they drive,” he adds.
Are telematics and pay-per-mile right for you?
So should you opt into one of these new pay-per-use auto insurance programs? Here’s how to know if it’s right for you:
If you’re a safe driver. If you haven’t had any recent accidents or moving violations, pay-per-use may be worth considering. How do you know if you’re a good driver? Here’s my recent USA Today column that will help you answer the question.
If you don’t drive a lot. If your car is parked in the garage for days at a time, paying insurance by the mile instead of a flat rate will probably cut your insurance bill. Then again, maybe you don’t need a car at all.
If you’re not overly concerned about privacy. You’ll be sharing your location information with your insurance company. If you don’t want a third party knowing where you’re going, skip the vehicle telematics and get a regular auto insurance policy.
Coleman says she met all three criteria and is pleased with her savings from Allstate’s Milewise program.
“I’ve saved money,” she says. “I also like being able to see how I drive.”