Pay-As-You-Drive is a concept whose time has come. It is an amazingly obvious concept, with wide benefits for consumers, the economy and the environment. The question is, why has it not taken off? It has been contemplated (I am told) since the early 1990s), and versions of it has been in test since 2000. It is only now that it being sold as a commercial product (as opposed to a pilot or test). Why has it not taken off yet?
Probably 3 reasons:
- The technology has been too expensive to date for telemetry. Norwich Union as an example had to build the black box from scratch at huge expense. Technology is now very cheap and becoming cheaper.
- Privacy concerns. People don't like being tracked. Not yet anyway. I don't entirely buy this reason – I think it is a storm in a teacup. Think about your mobile phone. You don't think your carrier knows where you (your phone) are always?
- Too complicated. The first set of products was very complicated. The Norwich Union one charged differently for time of day, type of road and combinations thereof. Just too hard to understand. That plus the fact that premiums were charged in arrears, so if you go on a long holiday by road, you get a big bill from your insurer.
- A Prisoner's Dilemma. But more about this in another post.
This post is about privacy. It is ironic that the only academic paper (that I can find anyway) on privacy and telematics was published in Australia in 2006. It proposes a solution where the onboard black box calculates the premiums in the confines of the car, and sends anonymous aggregate driving behavior data back to the insurer for modeling purposes, whilst preserving driver privacy. So let us get back to why privacy is a concern in the first place.
Why would people be concerned about privacy, with relation to -
- How they drive,
- When they drive, and
- Where they drive?
The only reasons I can think of are because of wrong doings. Either you're driving too fast, breaking the law in some other way, or maybe you're adulterous. Presumably existing privacy laws will protect you from your spouse catching you with your pants down, which leaves only breaking the law. From a society perspective, we have strict road laws, with large amounts of money being spent on a police force and infrastructure such as speed cameras. Safe driving is everyone's interest.
So the privacy concern for insurance would be that the government confiscates a copy of the black box data and charges drivers for misdemeanors based on the data. Is that a bad thing? I don't think so. It is a lot better than the current system, and will result in much safer roads. So should legislation ban GPS based devices? Probably not. Ultimately consumers will vote with their wallets, and if they think they're at risk because they drive like hoons they will opt out. From an insurance company perspective, that is a good thing.
The flip side is however also an interesting conundrum. What if the insurance company knows that a driver speeds often? What if it is clear from the data that a driver is putting others' lives at risk? Does the insurance company become complicit in the crime? Does the insurance company have a moral or even legal obligation to report the driver?
Ultimately I believe that all insurance will be telemetry based (Real Insurance does not rely on telemetry, but rather on a trust-based system), and all cars will be tracked by the government for all kinds of reasons (including taxes, law enforcement and traffic control). In the mean time, while the technology matures and while privacy issues are still open, we need some runs on the board with Pay As You Drive. The article below is one of quite a large number in the US about the technology and privacy. The original source is the Insurance and Technology Blog.
Getting Privacy Right in Pay-Per-Drive
By Anthony O'Donnell
Sep 19, 2008 at 08:44 AM ET
Our recent report on Real Insurance's mileage-only pay-per-drive policy raised, once again, the question of what it will take to get drivers to use such programs. Industry observers have predicted the resurgence of telematics (the monitoring of driver behavior via telemetry) but privacy concerns continue to shape insurers' pay-per-drive strategy, as the Real Insurance example demonstrates. The Australian insurer bypasses the "Big Brother" fears associated with telematics-based pay-per-drive programs by dispensing with telemetry all together and relying instead on customer-reported mileage alone.
Progressive´s convenient MyRate device represents an improvement on more costly "black box" technology that has hampered adoption.
Progressive has struck a different balance, dispensing with location information, but keeping the telemetry. The Mayfield Village, Ohio-based insurer has also addressed cost concerns that dogged Norwich Union's use of Progressive's patented methodology and technology: getting the "black box" that registered the telemetry proved prohibitively expensive.
Through its MyRate program, Progressive supplies a small, portable device that can easily be plugged into the on-board diagnostic (OBD) port of many car models built after 1996. The device delivers a much richer portrait of driver behavior than Real Insurance's mileage-only plan by recording mileage, braking and acceleration, and time of day. The device periodically transmits that information wirelessly back to Progressive.
With MyRate, Progressive has struck a compromise: the insurer loses valuable location information that it could use for underwriting purposes, but the carrier thus reassures customers uneasy with the idea of their insurer (or anyone else privy to the recorded information) tracking their every move.
Will that be enough for Progressive's Pay As You Drive to take off this time? Though the carrier has not reported any business metrics, Progressive claims that customer adoption has been promising. MyRate is now available in seven states and one out of three eligible drivers (e.g., those whose car has an OBD port) have accepted Progressive's offer to use MyRate, the carrier says.
2 comments:
Another suspicion about collecting all this information is that insurance companies will use the fact that you were going, say, 56 mph to invalidate a claim you file. Although technically over 55 mph, such nit-picking is, sadly, what many people expect from corporations.
Also, privacy in and of itself is a benefit. It's also a right that needs to be sufficiently justified to infringe upon. Your explanation--if you're not doing anything wrong, you need not be worried--is unconvincing to many people, and such logic ignores the broader societal benefits of the concept and reality of privacy.
BTW, I'm all for PAYD and think people should be given the option to have these black boxes installed in their cars. But I do not support making the sharing of such information a prerequisite for PAYD. Your trust-based system is a great foundation.
Hi Justin,
This is a great debate, is it not! It gets right at the heart of so many things, including public policy, privacy, the environment and how we organise ourselves in our communities with shared resources.
What we should NOT do with Pay As You Drive is over-engineer or over-emphasize issues. Technical nit-picking may be expected, but the reality is that regulations and laws governing insurance are incredibly consumer friendly, and that insurance companies (still) engaging in technical nitpicking don't get very far.
It is useful to take a step back and look at the social function of insurance: It is a privatised pool of money to which consumers contribute to, in order to transfer risks that they should not bear themselves. 99.9% of people that take out insurance, do so because they actually want insurance. This is why we believe our trust-based product works.
Insurance companies have a duty towards their shareholders AND customers to make sure that the 0.1% of people that target insurance companies with fraudulent activities do not get away with it. Insurance companies also endeavour to get enough money into the pool to satisfy claims, pay the expenses of running the company, and giving shareholders a reasonable return for putting capital at risk.
BUT, thanks to free market enterprise, consumers are still free to choose where they place their risk, and through both regulation and the speed of information, insurance companies are kept honest. So consumers who do allow their driving behaviour information to be analysed through whatever means, will benefit from becoming part of risk pools where they get a commensurate charge for the risk they contribute. Similarly, people who do not contribute their information, will be charged what amounts to an uncertainty premium. Free market? Yes it is, with the benefit of regulation and ombudman schemes working at making the playing field even and fair for consumers.
But I agree strongly with you, that information sharing should be free choice, not mandatory or enforced.
It would be good to continue discussing these points and getting to a better public understanding of the issues.
All the best
Roger
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