Description:
Traditional car insurance rates vary little, if at all, based on mileage and observed driving safety, even though they clearly and directly relate to crashes and claims, and charging based on actual risk exposure would improve safety and the environment, reduce energy use, and lessen crash-caused congestion. Brookings Institution research shows that pay-as-you-drive insurance (PAYDI) would lead to an 8% reduction in driving. Other research points to crash reductions, and likely claims’ reductions, that would be about 1.4 times that amount, typical infrastructure improvement savings of 3 to 5¢ for every mile not driven, and between $50 and $60 billion in net social benefits in the U.S. from reduced driving related externalities, including congestion reduction that has been shown in many instances to be disproportionately greater than the reduction in traffic. ( For example, the Oct. 22, 2008 INRIX report, “The Impact of Fuel Prices on Consumer Behavior and Traffic Congestion,” concluded that the price spikes led to a 26% reduction of peak-hour congestion, resulting from a much smaller reduction—i.e., around 3%--in vehicle-miles traveled.) Brookings also projects that 63.5% of households would save an average of 28% on their total premiums or about $496 annually for the households that do save, which would be a huge economic stimulant.
The ability to monitor driving activity for the purpose of improving safety has grown exponentially in recent years. While some personal lines insurance products have begun to use observed exposure data for premium setting, the tremendous potential for PAYDI applications to lead to substantial public and private benefits, and opportunities for small and mid-size businesses, is nevertheless not being realized.
The suggested approach to improve this situation entails enlisting small and mid-size businesses—including vendors of in-vehicle telematics equipment—to work with personal lines insurance companies and environmental and consumer groups to gather data needed for competitive PAYDI pricing. An industry is emerging in the U.S. and internationally to combine telematics and car insurance. Indeed, the “Insurance Telematics USA 2013” conference in Chicago attracted another sellout crowd of 500 participants. The market today for PAYDI telematics technologies and services has technology and data providers selling services and products directly to insurance companies, and the data is not in turn offered back to consumers in a format that would enable them to solicit competitive PAYDI rates as they are able to solicit for traditional car insurance. The result is that the dominant insurance company products that include PAYDI elements offer rates that are informed by driver data, but such data remains in a “black box” to consumers who might otherwise want to share them with competitors to secure lower premiums. The public policy benefits of having consumers appreciate how their driving affects their rates (including the number of miles driven in congested conditions) and then being provided an opportunity to change behavior to save on premiums is lost because of how the market is developing. Therefore, there is a need to create a marketplace that would enable consumers to collect and share their own driving data linked to crash risk—including about driving amounts, conditions (e.g., related to congestion and time of day), and vehicle handling (e.g., prevalence of hard braking)—which would enable insurance carriers to offer competitive and comparable PAYDI rates.
The product described will satisfy FHWA strategic goals related to system performance, congestion reduction, environmental stewardship, and safety. In addition, it is anticipated that this project may be of interest to the Department of Energy and Environmental Protection Agency for Phase II funding.
Expected Phase I Outcomes:
Outcomes expected from the Phase 1 include a detailed concept that demonstrates the viability of one or more consumer telematics products and systems from which at least three insurance companies agree to accept the data to offer competitive premiums.
Expected Phase II Outcomes:
Phase II efforts would include demonstrating a working prototype (which may or may not include the manufacturing of a new product) of an in-vehicle telematics device, linked to a data integration and warehousing system, that would gather and inform consumers of their driving data and enable consumers to share such data with insurance companies in exchange for competitive pricing and guidance on reducing risk.
