An investigation of telematics, or usage-based, auto insurance programs by Consumer Reports reveals that auto insurers collect substantial amounts of information to calculate insurance premiums for participants as well as data that may be used for other purposes, the Consumer Federation of America reported Oct. 7.
The scale of data collection by auto insurers poses substantial privacy and discrimination concerns for consumers, as reported by CR. The CR investigation provides consumers with a chart for comparing the pricing approaches of different companies; the four most common behaviors used by insurers to calculate premiums are: number of miles driven, amount of hard braking done by drivers, time of day driven, and any phone use that occurred while driving.
Earlier this year, Consumer Federation of America issued a white paper on the subject – Watch Where You’re Going: What’s Needed to Make Auto Insurance Telematics Work for Consumers – highlighting the need for regulators and lawmakers to provide stronger oversight of these auto insurance products. While telematics offers the prospect of reducing unfair pricing practices in the market today and incentivizing safer driving, CFA warns that guardrails must be established before consumers can feel confident that these programs are fair and do not create new risks for customers.
Auto insurers, including Allstate have been pushing regulators relative to transitioning to underwriting customers using telematics to determine rates, but at least two state regulators have voiced concerns about this transition, according to the Wall Street Journal. Louisiana Insurance Commissioner Jim Donelon would want strong consumer protections for what insurers can do with telematics data. District of Columbia Insurance Commissioner Karima Woods said the data collection could lead to a new wrinkle on redlining if insurers set rates based on where cars drive or park.
“Auto insurers have been promoting telematics programs to consumers, but for too long there has been a lack of useful information about how the programs evaluate drivers and the scope of the data used,” said Michael DeLong, a research and advocacy associate with CFA. “As a result, consumers have found it difficult to determine what information determines their premiums and to meaningfully compare the programs. Consumer Reports’ new investigation fills a much needed gap, and highlights key concerns that consumers should keep in mind when they are considering these programs.”
In telematics programs, auto insurers connect a device to the insured’s car or use a mobile app on the insured’s phone to collect information about driving habits, which is then used to calculate insurance premiums. Theoretically, if consumers drive safely and avoid risks, they could receive discounts based on their behavior. The promised discounts vary widely, from up to 15 percent for Farmers to up to 40 percent for Nationwide, according to CFA.
Using the official product pages, terms of service, privacy policies, and license agreements, Consumer Reports studied the telematics programs offered by America’s 10 largest auto insurance companies. All the insurers except GEICO, which did not respond, helped CR verify the information they compiled. According to this reporting, the insurers vary widely in what information they collect and use to calculate consumers’ premiums. Some gather data about how quickly drivers accelerate, some gather data on their speed, others on the amount of hard braking. For example, Allstate’s Drivewise collects information on hard braking, speed, and the time of day that consumers drive. State Farm’s Drive Safe and Save collects information on fast acceleration, hard braking, sharp cornering, speed traveled, the time of day traveled, and the distance traveled.
While the telematics programs of some insurers are clearer than others, one common trait is that they require consumers to surrender a substantial amount of privacy. All 10 programs gather large amounts of detailed data on consumers, and nearly all of them state in their terms of service that, in addition to using the data for premium-setting, the companies can also use this data to analyze insurance claims.
The use of telematics data for claims handling needs further scrutiny by regulators and policymakers to understand how telematics is used to determine whether a policyholder was partly at-fault or negligent in a crash, and to make sure that it does not become a tool by which insurers unfairly delay, diminish, or deny legitimate claims. This is especially important where states’ contributory negligence laws can be used to deny claims if insurers can place some of an accident’s blame on their policyholders. Additionally, the rules must also ensure that policyholders have full access to all data about their driving and any crash-related data.
Without strong oversight insurers could use telematics to unfairly discriminate against drivers based on qualities beyond their control. For example, almost all insurers use the time of day driven to calculate premiums; many workers in low-wage jobs work long hours or night shifts, which could result in them paying higher premiums because they must drive to and from work at those hours. Another possible example is that all the major insurers investigated use hard braking to calculate premiums as well; hard braking could be a sign of poor driving, but it could also indicate that drivers are alert and taking action to avoid crashes. In both cases, these factors could result in higher auto insurance costs.
CR reported that some insurers’ telematics fine print states that the companies have the right to use this information for marketing purposes. Several insurance companies state they can hold on to consumers’ information for as long as they wish. This data can include in-depth maps of your driving trips, when you made them, and your driving behavior. In many cases, companies have provided no information about whether or not there are any limits to how they might use this data.
Chuck Bell, programs director at Consumer Reports, recommends that people shop around for the best deals and conduct thorough research. “Telematics programs vary significantly from company to company, so it’s critical that you thoroughly research the programs you are considering, and carefully compare the details of how they work,” he said. “Consumers should proceed with caution before signing up for telematics programs given how secretive insurers are about the data they collect and how it will be used to evaluate claims.”