Rising car insurance rates are piling financial stress on Americans. 43% of insured drivers in the U.S. said they’re paying more for car insurance than they were a year ago, according to the 2023 Policygenius Car Insurance Affordability Survey. One way some drivers are attempting to save money is by trying usage-based insurance policies, which base your premiums on how well you drive, how frequently you use your car, and when you drive — usually by tracking you through your phone.
Seventeen percent of auto insurance customers now participate in a usage-based insurance program, whether through a traditional car insurance company like Allstate’s Drivewise, or a standalone UBI company like Root. This rate has doubled since 2016, according to the J.D. Power 2023 U.S. Auto Insurance Study. Many of these customers are new to usage-based insurance. Given the savings — $113 per year on average — and the rising cost of auto insurance, it’s surprising that even more people haven’t tried usage-based insurance. The study points to one reason why. One-third of participants in a UBI program have only used it for a year and so far, not everyone is convinced it’s worth it: Only 38% of customers say the information collected is “always accurate.”
Privacy concerns about usage-based insurance
UBI works by tracking your driving habits, based on factors like how often you brake suddenly, how fast you drive, when you drive, and whether you use your phone. Drivers install either a device that plugs into their car or a mobile app that sends driving data to the insurance company. A majority of Americans (68%) said they value their privacy more than any savings offered by an app that collects driving behavior or location data for an insurance discount, the Policygenius Home & Auto Insurance Technology Survey found.
Because of these concerns, it’s likely that only the most tech-savvy drivers are opting for usage-based insurance in response to higher car insurance premiums, says Richard Peter, an associate professor of finance at the University of Iowa’s Tippie College of Business, especially since there are other ways to save on auto insurance premiums, like raising your deductible, reducing your coverage, or bundling your auto and home insurance. Some people might also avoid UBI because they’re bad drivers and wouldn’t benefit from having their data tracked.
Peter’s research argues that UBI might be more popular if consumers were convinced of its accuracy. Based on the J.D. Power study, this isn’t the case so far.
“The monitoring devices themselves are fairly accurate from a technical standpoint, but insurers (or third-party providers) use complex algorithms to turn driving data into driving scores, which then determine premium discounts,” Peter says.
Consumers who worry about how these algorithms score their driving might avoid UBI contracts, Peter says. For example, let’s say you brake hard, a habit that can lead to lower scores: Does the tracking device know whether you did it to avoid an accident or because you were tailgating the car in front of you?
More transparency could get more people to try UBI
Despite rising premiums, most people say privacy concerns are holding them back from trying UBI. What can insurance companies do to assuage these concerns? Insurance companies can always do more to tell consumers how they keep their data private. Peter’s research suggests greater transparency regarding the algorithms employed by usage-based insurance products could also help.
“For example, maybe there could be a few ‘freebies’ each month that are dropped from the data that determine driving scores,” Peter says. In other words, insurance companies could let drivers know they’re letting a few instances of hard breaking or fast turning slide. “Or maybe a simple web interface that gives consumers who are concerned about misclassification an opportunity to clarify the circumstances. Our theory predicts that a reduction in the rate of misclassifications leads to more take-up of UBI contracts.”
While there needs to be more research on the effects of UBI, Peter says there is some evidence that these policies help people drive more safely. When people know their driving is being recorded, they tend to drive better over time, making roads safer for everyone. But people need to trust the technology first.
Image: Negatina / Getty
