Homeowners insurance blog

The Case for Pay-As-You-Drive Insurance

To our readers: This is the winning essay in the HomeownersInsurance.com scholarship competition. It was submitted by Robert Flowers, a junior at the University of Central Florida in Bradenton, Fla. We are proud to award him a $1,000 scholarship.

Telematics devices that monitor the activities of drivers as they drive have been gaining prominence over the last few years and seem to be the way of the future in the automobile insurance industry. By giving insurance companies data concerning the actual habits of individual drivers, insurers can offer discounts to drivers who show safe driving habits and are, therefore, a lower risk to be involved in auto accidents.

Privacy concerns have been raised by critics of the technology. These opponents of the devices feel there is the possibility of real time GPS tracking, that personal information might be sold to third parties, and that the devices might turn into punitive devices to punish bad drivers. The benefits of pay-as-you-drive insurance, however, far outweigh the concerns, as telematics devices make for safer roadways, act as a teaching tool for inexperienced drivers, and a fairer pricing structure for all insured.

The most important benefit of telematics devices is their ability to make roadways safer for all drivers. Drivers with these devices installed in their vehicles know that unsafe driving habits can cause them to pay more for their car insurance. Because of this, the behavior of these drivers is altered in such a way as to make them avoid unsafe driving practices. A greater number of drivers being influenced to drive better create a greater numbers of safer drivers on the roads.

More safe drivers would lead to fewer accidents, saving both insurers and insured money and resulting in fewer auto fatalities. It would seem to make sense, then, that telematics devices should be required equipment on all vehicles. Despite the privacy concerns, the ability of these devices to create safer drivers and, therefore, result in fewer auto accidents is a social benefit that is greater than one individual’s privacy concerns.

Another key benefit of the telematics devices being installed in automobiles is the fact that they can act as an educational aid for younger drivers. According to the Centers for Disease Control and Prevention in Atlanta, auto accidents are the leading cause of death for American teens. Teen drivers do not have the years of driving experience that older drivers do. Safe driving practices have yet to become habitual for them. Their inexperience leads them to be more easily distracted by cell phones and other passengers.

Having a device in their vehicle that alerts teens when they are performing an unsafe driving act enables them to correct these unsafe acts in the future. Those devices also give parents the ability to monitor their teen’s driving and further assist in driving education, as well. Simply because a teen receives a driver’s license does not mean they are immediately a perfect driver.

All drivers could undoubtedly use an occasional gentle reminder to improve their driving habits, but it’s even more essential to those young drivers who have yet to obtain the experience and maturity to understand the dangers behind bad driving.

Third, telematics devices lead to an auto insurance pricing structure that is more equitable for everyone paying into the insurance pool. The current pricing structure for auto insurance is based on statistical generalities that place drivers into risk groups based on age, gender, marital status, etc.

For years this has been the best way for auto insurers to asses drivers’ premiums based on their risk potential. Statistics have shown, for example, that younger drivers tend to be involved in a greater number of accidents, as do male drivers. The problem with this pricing structure, though, is its generality. One individual 18-year-old male driver may be a far safer driver than one particular 45-year-old female driver. That particular 18-year-old male driver is punished simply because of his age and gender.

With pay-as-you-drive technology, his insurance company can evaluate his driving data and see that he is, in fact, a very safe, low-risk driver and charge him a fairer premium in accordance with that information. Discriminating against certain risk groups based on statistical generalities may have been the best way for insurance companies to determine premiums in the past, but the technology is now there to create a truly equitable price structure for all insured drivers.

As for the arguments that the detractors bring up due to privacy concerns, none of the arguments seem to have much validity in light of the immense benefits that telematics devices provide. Real time GPS tracking is indeed a possibility with these devices, but most of these critics can already be tracked by their cell phones anyway. Additionally, pictures of their license plates are taken innumerable times each day at red lights, toll booths, highway on ramps, and the like.

Selling drivers information to third parties is also a real concern, although none of the insurers currently engaged in pay-as-you-drive technology are engaged in such practices, and there would undoubtedly be serious consumer backlash if such a practice were implemented by any insurance company.

The final argument of critics is whether the use of telematics devices will be shifted from their current use of rewarding good drivers to a system that also penalizes bad drivers. Clearly, it has been shown that using telematics devices to punish bad drivers wouldn’t be such a bad thing. If the end goal is to make safer roadways and provide a more streamlined premium structure, punishing bad drivers is an inevitability of this technology.

Everything comes at a cost. In order to gain something in one area, it is necessary to give up something in another. This is obviously true in the use of telematics devices.

Opponents have some valid arguments, but in the case of creating safer roads, better educating young drivers, and creating a fairer auto insurance pricing structure, these extremely important ends justify the means of possibly giving up a little privacy. If the technology is there to save lives and save money at the same time, it would be a mistake not to make use of it, no matter what the cost.