Auto insurance companies are experimenting with charging drivers based on their actual driving rather than the typical bevy of statistics like driving history, location and age.
Rather than filling out the form, submitting your driver's license — and being confused about all the other factors that may be used in generating an insurance quote beyond your actual driving history — you simply let the insurance company watch you drive for a little bit and come up with a quote based on that actual recent driving history.
The technology is called usage-based insurance. One company at the forefront is Ohio-based start-up Root Insurance, which recently raised $100 million in Series D funding, pushing Root's valuation closer to a $1 billion valuation. Root Insurance operates in 20 states around the country, with plans to expand service to all 50 states by 2019.
Auto insurance incumbents are also experimenting with usage-based insurance, fuelled by the ubiquity of smartphones and availability of telematics devices. Progressive Insurance, for instance, offers its customers discounts based on their driving through its "Snapshot" program. James Haas, business leader of usage-based insurance at Progressive, said it uses an app that tracks your driving and offers discounts and rewards for safe driving.
"The benefit for the consumer is both the encouragement of safer driving -- and the opportunity to earn discounts for that safer driving -- all in the way they want (either with the dongle or the mobile app)," Haas wrote in an email to CNBC.
In effect, the concept gamifies driving, and discounts are earned over time as a way to encourage drivers to keep the app running, which requires having location tracking turned on.
According to Progressive's "Snapshot" privacy statement, the collected data is also used to calculate an insurance quote or the rate the driver will pay when a policy renews. Users of Progressive's "Snapshot" app will receive a first-term discount and a personalized insurance premium afterwards based on their driving habits, according to the "Snapshot" terms and conditions.
Root Insurance has a similar approach. Download their app onto your smartphone, turn on location tracking, upload a picture of your license, and off you go. No need to log trips, sign on, or open the app while driving, or at all. The app runs quietly in the background, passively absorbing all sorts of data about your driving skills. Where it differs from Progressive is in the financial incentive. Root doesn't offer discounts over time as it gather a driver's history, or use the history for renewal quotes. After a two-week initial trial period, out pops an insurance premium, and then the user no longer needs to keep the app running.
But there's a catch. To build a profile, the app continuously sits in the background watching you.
The persistent monitoring is necessary to build a complete profile of a user, said Dan Manges, chief technology officer of Root Insurance. The company says it tries to be as upfront as possible that the app will monitor you at all times and can't be switched off without disrupting the trial period. Users can also manually disable its tracking features once the trial period ends, and while an untouched app will continue to gather data, Manges says it is used only to further refine their algorithm rather than re-rate an individual customer's premiums.
The model, like many in the technology sector, creates a data-based bargain for the consumer — but with the added price of privacy concerns.
Privacy experts already have uncovered consumer fears. In 2016, the Pew Research Center conducted a study on how Americans approach privacy, asking if Americans were willing to allow insurers to monitor driving habits and, importantly, location, in exchange for a discount. Pew found that many Americans are willing to "share personal information in exchange for tangible benefits," for instance, a discount on insurance, but Pew found that location was an important, and deeply personal, part of people's lives.
Forty-five percent deemed the tradeoff unacceptable, with only 37 percent of respondents finding it acceptable. An additional 16 percent said it would depend on the circumstances. "For some people, knowing their location was a deal breaker," and wasn't worth sacrificing for potential insurance savings or discounts, said Lee Rainie of the Pew Research Center.
"Location data seems especially precious in the age of the smartphone," the Pew team wrote in summarizing its findings. "Some of the most strongly negative reactions came in response to scenarios involving the sharing of personal location data."
Other experts reached similar conclusions. "Geolocation is one of the more sensitive data points, said Lauren Smith, policy counsel at the nonprofit advocacy group Future of Privacy Forum. "It reveals what stores, clinics, religious destinations you go to."
There are doubts about whether a phone is accurate or reliable enough to collect data to assess insurance premiums, said automotive services expert Colin Bird, senior analyst at IHS Markit. Root Insurance and other telematics-based apps use the sensors already on most smartphones to generate a profile of a user's driving habits. It uses the accelerometer, gyroscope, global navigation systems (like GPS and GLONASS), and compass to help build a profile of each user.
Root Insurance says this is a daunting challenge. "The sensor data [from phones] is very noisy," Manges said. "We build models to take into consideration the sensor data is noisy."
A phone would also ultimately be unable to tell if the user is a driver or passenger.
Root's persistent monitoring of drivers has led to user complaints. Get in a taxi and it might start logging your Uber driver's crazy drifting, dinging your score accordingly. Take a cross-country flight and the app will record your supercar-like acceleration.
"I did the test drive, however, it said seemed like it calculated every time I moved at a decent speed including while on the commuter train," wrote a user named Derek Haber in the user feedback section on Root's Android App Store page.
"The app begins crunching the numbers when: 1. I run on a treadmill 2. The airplane is taxiing before takeoff and after landing 3. I ride in an Uber / Lyft 4. I am in the passenger seat when my friend is driving," wrote a user named Venkat Raghavan.
Bird said most insurance carriers that use a smartphone to gather data work around this limitation by logging trips only when the customer's phone is connected to the car's bluetooth radio. (Root Insurance does not use this method.) Others, like Progressive Insurance's "Snapshot" program, allow users to categorize past trips if they weren't the driver. In addition to the smartphone app, Snapshot also gives users the option to use a separate dongle that plugs directly into the diagnostics port of most modern cars, capturing data like braking and use of safety systems directly from the vehicle.
In fact, component suppliers like ST make many different grades of accelerometers, including two separate categories for automotive applications and for consumer gadgets.
There is also a bleaker underside to usage-based insurance.
"The early adopters think they're safe, they're happy saving money," Rainie of the Pew Research Center said. "But at some point, as the market progresses, people become worried about not participating."
If usage-based insurance becomes common, customers outside of the pool of users could face increasingly high premiums for not giving up their privacy.
Root Insurance says its customers can get rates up to 52 percent lower than their previous insurers. The company says Root customers report average savings of $1,187 per year on car insurance policies compared to their previous rates with other providers, although the company notes this average includes policies with more than one driver and a younger user base that tends to be charged higher rates.
Haas said Progressive's Snapshot program has handed out over $700 million in discounts, with individual drivers saving an average of $130 a year.
Other experts say there is no cause for concern — at least not yet.
"There is probably a subset of users who have not and will not turn on these services," said John Verdi, v.p. of policy at the Future of Privacy Forum. Verdi says telematics have the potential to price more accurately than traditional insurance factors like age or location. But while there's the danger that it will hit underserved groups the hardest, offsetting that is the existing data set on which insurance can be priced.
Traditional auto insurance has been around for so long actuaries are familiar with all possible risks and can price them into quotes accordingly. "Is it the case moving forward that folks who choose not to be tracked will pay a penalty? Yeah," Verdi says. "Is it the case the insurance will be so disproportionately priced to drive people to telematics? I'm skeptical. We have a regime that allows people already to predict risk," Verdi said.