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There's no shortage of tech giants jumping into the auto industry—hello Tesla!—but one start-up is tackling a niche part of the space that hasn't had much disruption: the car insurance market.
While Apple and Google are working to bring their software to cars, Metromile, a San-Francisco based start-up, has created a device that captures mileage data to determine how much a person should pay for their car insurance policy.
"This device opens up diagnostics and other data to do insurance," said Dan Preston, the company's CEO. "Effectively this is a really cool data problem and there are a lot of really cool things we can do that can open up transparency and build better services for drivers."
Here's how it works: The company offers drivers a free plug-in device that turns ordinary cars into smart cars. The device works with Metromile's smartphone app, called Metronome, and does things such as diagnose the health of the car, locate it and offer tips to help the user with their daily commute. (Metromile also sells car insurance of course, underwritten by National General Insurance.)
Perhaps most importantly, the device measures mileage so that the driver's insurance costs are in line with miles driven. It does not, however, track driving behavior or skill, and does not sell users driving data, Preston said. Metromile's customers' average saving of about $500 a year, he said.
"Google and other tech companies are really concerned with putting Pandora in your car. But there are these other critical areas that have to do with how you actually deal with your car, like its maintenance and repairs, that we are trying to fix, " he said.
Metromile gives away its hardware piece for free to drivers and does not require users to be insured by Metromile to take advantage of the other applications, such as car diagnostics. However, at the end of each month the company sends users who are not paying customers a notification that tells them how much they would have saved if they had been covered by Metromile.
So far Metromile is available in California, Oregon, Washington and Illinois. But Preston said the service would soon be coming to more states, including New York, in the coming months.
While pay-as-you-go insurance isn't a new concept, it has never really been adopted by big insurance companies for a few reasons, Preston said.
"The main reason is there's been no way to really verify people," he said. "But with our device, it plugs into your car and reports back at the end of the month so that we bill you retroactively."
Another reason the pay-as-you-drive model hasn't taken off is because current insurance companies simply can't afford to change their model, Preston said.
"The reason an insurer wouldn't start doing this now is because they have this book of business that spans all different mileage buckets and if they were offering per mile insurance, all of their high-mileage drivers would have their premium raised and they would leave. So this is very disruptive to their business," he said.
However, as transportation on-demand services like Uber and Lyft become more mainstream, there may also be an increase in the adoption of the pay-as-you-go auto insurance, said KPMG analyst Gary Silberg.
The cost of the insurance could be included in the transaction fee, essentially making customers pay for the insurance coverage of their ride.
Even more, the eventual rise of self-driving cars could mean more pay-as-you-go insurance, because the cost of the driver disappears and could be replaced with a nominal fee that pays for insurance, he said.
But for now, Preston said his company is focusing on targeting drivers who just don't drive that much, especially urban drivers.
"This is really for the half of the population that is currently subsidizing the other half," Preston said.
—By CNBC's Cadie Thompson.