Insurers are experimenting with new technology that tracks how many miles you drive, your driving patterns and other nuances in how you drive, in order to price policies and offer discounts.
As part of the process, insurers will typically require that policyholders download an app that will use the phone's GPS system and location-tracking to generate a picture of how the policyholder drives.
Many of these apps will rate your driving and good drivers can earn discounts and rewards for safe driving, based on the data collected by the app.
Insurers are betting that by giving drivers an opportunity to earn discounts for safe driving, they will install the apps on their smartphones and "gamify" the driving experience. If people can earn discounts, they may in turn become more mindful of how they drive.
This usage-based insurance technology is catching on fast and more insurers are adopting it. In the United Kingdom, which is a bit ahead of us on this curve, experts predict four in every 10 drivers will have usage-based insurance by 2020.
How it works
The apps typically use your phone's GPS, accelerometer, and gyroscope to rate your driving. They can also detect phone-related distractions, which contribute to about 15% of vehicle accidents and some 3,500 deaths annually in the U.S., according to the National Highway Traffic Safety Administration.
After that, the app will be used in part to generate the premium for the next policy. If the insurer thinks you are riskier than it thought, it could raise your rates. At the same time, if you are an exceptionally safe driver, you could benefit from safety discounts you receive.
The data that insurers collect will be used to generate quotes for the next policy renewal. Insurers will also usually offer a sign-up discount, available after the app is installed and an account is created.
While some apps gather information on your driving during the entire policy period, others will track you initially for two weeks while you drive, in order to generate a quote. And for those who continue using the app and are rated well by the apps, the insurers can offer discounts.
Using these apps is optional and policyholders need to opt in to the program. Discounts can vary from insurer to insurer, from about 5% to 30%, based on your driving habits and performance.
Besides apps, insurers are offering their policyholders plug-ins, beacons or dongles that are to be kept in the vehicle and usually pair with an app.
Some of these devices go beyond what a smartphone app can offer, such as measuring left and right turns, acceleration, braking speed and the time of day that you are driving. The devices themselves will often connect to a phone app.
These apps can give regular feedback to the driver, telling them in what areas they can improve their driving. Some even give drivers a letter grade, which again gamifies driving by encouraging the policyholder to improve their driving.
There are obviously privacy concerns with this approach, since people could be sharing their location data with their insurer at all times.
And, not everyone is willing to share that much. A 2015 Pew Research study asked the following question:
"Your insurance company is offering a discount if you agree to place a device in your car that allows monitoring of your driving speed and location. After the company collects the data about your driving habits, it may offer you a further discount to reward you for safe driving. Would this be acceptable or not?"
There are some drawbacks. The app will track you wherever you go, and the data could be subpoenaed for court cases.
The phone could also think you are driving a vehicle, even when you are a passenger. That's not good if your driver takes risks and speeds.
Some people have complained that the app even tracked them when they were buzzing along on a commuter train or in an airplane while it is taxiing before take-off.
That's why some apps are taking the extra step of only tracking drivers when their phone connects to their vehicle's Bluetooth.