Now more than ever, drivers are trying to find new ways to save money on auto insurance. Insurance companies are well aware of this fact…and believe it or not…are looking to do just that.
This is easier said than done, however. Up until recently, there have been a limited number of ways an insurance company can lower auto insurance premiums while still maintaining profitability.
Beyond reducing operating costs (such as administrative expenses, advertising and commissions), the biggest factor influencing pricing is lower claims experience. That means the less a company anticipates spending on auto claims, the less they need to charge drivers.
Here’s the catch. Insurance companies need an actuarial reason to lower auto insurance rates. In other words, they have to find sound evidence that accurately predicts driving habits in order to identify those drivers who deserve a lower rate.
Historically, companies have attempted to do this, in part, by identifying and grouping drivers with similar usage. “Pleasure” rated, and “Commute” are two common usage groups. So is “Business” use. However, many companies further refine these categories (ex. commute” 4-12 miles to work, “commute” 13-20 miles to work, “commute” over 20).
They take this data, measure the loss experience of drivers within each group, and create classification factors that are used to determine insurance rates for each of them.
It’s pretty clear that this can be less than accurate. For instance, should all “Pleasure” rated drivers be lumped together? Shouldn’t “Pleasure” rated drivers who drive less than 5,000 per year get a lower rate than someone who drives 10,000 miles per year?
In some cases, the rating factors determined by these classifications don’t even make sense. For instance, “Commute” drivers are usually charged more than “Pleasure” rated drivers. Really? What’s more risky: someone who drives 9 miles to work, parks the car for 8 hours, then drives home and parks the car in the garage until the next day…
…or a stay at home parent who picks up, and drops kids off to school, band practice, and soccer games, while running to the grocery store in between these trips?
These classification factors also fail to differentiate driving ability, so those with good habits may not be rewarded appropriately.
Companies are aware of these shortcomings. That’s why so many of them have turned to Telematics as the best solution to reward the best drivers.
What is telematics?
It’s a means of electronically monitoring individual driving habits, and using that data to more accurately charge rates that are tailored to each driver. This allows insurance companies to pinpoint an individual’s driving habits to better predict future claims.
Yes, technology is finally catching up with the insurance industry. Telematics is now being offered by well established, and reputable insurance carriers, as well as new and edgy “InsureTech” companies flush with venture capital.
According to the Insurance Information Institute, “Nine of the top ten private passenger automobile insurers have a usage-based insurance program in place”.
How does telematics work?
Essentially, your insurance provider will access your driving habits via a downloadable app on your smartphone, or a separate devise that can be plugged into your vehicle. This monitoring process will last 3 to 6 months.
What do they measure?
Miles driven, hours of operation, and how fast you start & stop, to name a few. Some companies will also factor in the type of roads you normally drive (highways vs local).
For some, this may seem like a gross infringement on privacy. No worries, then this may not be for you.
But, aren’t you already providing personal data about yourself? Think about it. Do you currently share your location with your phone apps? How about files and photos sent to the cloud? Do you get emails and texts on your phone? Have you held Zoom meetings with your doctor (or anyone else)?
If so, it may be time to share a little information with your insurance carrier.
Is the savings significant?
For starters, most companies will immediately reduce your auto insurance premium by 5-10% just for signing up. In best case scenarios, drivers can save up to 35% after the monitoring period is completed.
This doesn’t mean you have to be a “super duper” driver, or even a “super” driver. Somewhere between “good” and “excellent” may provide you a significant savings.
According to Progressive Insurance, the average savings for customers who use their “Snapshot” telematics program is $145 per car. Auto-Owners Insurance states that customers save an average of 15% when taking advantage of their “TrueRide” telematics program.
Beyond good drivers, telematics is also a great opportunity for senior citizens to save more of their fixed income. I often hear my retired clients tell me they drive their vehicles less than four or five thousand miles a year. That reduced mileage can translate into even greater savings when using telematics.
This is also a great way for parents to monitor the driving habits of the youthful drivers in their household. Most companies provide the driving data as feeback…in real time.
In fact, some apps will actually beep or notify you when a particular driving habit (fast starts) is outside the parameters of good driving. This information can be shared and discussed with your young driver as a learning tool to establish better skills in the future.
Can my rates go up?
Although uncommon, some companies will actually increase your rates if your driving habits are really below par. According to Progressive Insurance’s website, 2 out of 10 drivers get an actual increase. So, if you speed regularly, drive after midnight, brake hard, or love jack rabbit starts…you might want to pass on telematics.
Now, the good news is 8 out of 10 drivers don’t get an increase. More importantly, not all companies do it. For instance, Auto-Owners Insurance will not increase rates due to findings.
Aren’t sure if telematics is for you?
Many companies will allow you to participate in the program before actually purchasing auto insurance from them. This will give you the opportunity to get an indication of what your auto insurance rate will be before signing up.
For many, telematics is a great opportunity to reduce auto insurance premiums far below what would otherwise be possible.
If interested, call your local agent to find out if your current company offers the discount. Otherwise, ask him/her for quotes from companies that do.
For more information, please feel free to call our office.