How COVID-19 has changed auto insurance, likely forever

What if your car insurance premium changed every month depending on how often you were driving, or as a result of how safely you were performing behind the wheel?

According to David Ford of Traverse City’s Ford Insurance Agency, that kind of possibility isn’t so far off. The concept is called “telematics,” and while Ford jokingly calls it “pretty Star Trek-y,” he also said most people have had some form of it in their lives for years without necessarily realizing the many implications.

What is telematics exactly? At this point, no one can quite agree on a single definition. Linguistically, the term is derived from two other words: “telecommunications,” which means “communication at a distance” – often in reference to the technologies that make that communication possible; and “informatics,” which means “information science.”

Telematics, then, can fairly be defined as the tracking and monitoring of information from a distance. Some definitions of the word specifically isolate it to vehicular data tracking, in part because one of the most common uses of telematics today is in the monitoring of trucking fleets through technology. However, a broader and more general reading of telematics opens the term up to tech and devices that many people use every day, from fitness trackers to smart home technologies.

In the trucking, freight, and logistics industry, companies use telematics in fleet management for many reasons, including to track driver behavior. By monitoring details like how fast a truck is moving, how often the driver brakes, how hard they are braking, how quickly they accelerate from a stop, and other similar metrics, a fleet manager can assess how safely or recklessly that operator is driving. If dangerous driving is flagged through telematics, the fleet manager can discipline the driver or even terminate their role with the company. Telematics, in this situation, plays a key role in helping logistics companies manage risk.

Ford said there is similar potential for telematics to change the game for car insurance. To some extent, driver behavior has always affected vehicle insurance policies, in that an accident or a speeding ticket can raise a driver’s premiums or even put their policy at risk for being dropped. Telematics could evolve this model by allowing insurance providers to monitor how their customers are driving on a minute-to-minute basis – a trend called “usage-based insurance” (or UBI).

“There’s one insurance company who’s been the out-front leader [in using telematics],” Ford said. “They’ve been saying for years, ‘If you’re a good driver, we want to reward that.’ If you are speeding all the time, or you’re slamming on your brakes hard, or you’re weaving in and out of traffic, that’s going to impact where you are on the safe driver gradient, which is going to affect your policy.”

How common is this type of data-driven car insurance coverage – both nationally and for drivers here in Traverse City? So far, not very. Ford said that, beyond the one company that has been a trailblazer in this space, most vehicle insurance providers that Ford Insurance works with haven’t gotten into the game just yet.

“We’ve asked our other insurance companies, ‘Hey, do you guys have a telematics thing going on?’” Ford explained. “And they’re not always saying ‘yes’ or ‘no.’ They’re saying, ‘Well, we’re kind of studying it,’ which probably means they’re testing [the technology] in a lab.”

Ford’s anecdotal experiences bear out in terms of national trends. According to McKinsey & Company, UBI was only offered by six percent of U.S. insurance companies as recently as 2016.

There are factors that make telematics-based insurance a questionable new terrain for insurance providers – namely privacy concerns. There has been a pushback in recent years against the collection of consumer data, and insurance companies tracking a policyholder’s every move behind the wheel could spark conversations about surveillance, data security, and customer safety. The technologies necessary to collect the data for UBI are also costly, which could slow adoption.

If there is one thing that could push the needle toward telematics as a driving force for car insurance, though, Ford said it might be the pandemic. Last spring, when COVID-19 hit and Michigan entered stay-at-home mode for the first time, Ford recalls how customers started putting cars in storage and temporarily cancelling their auto policies.

In the year since, with less commuting and less travel for many people across the nation, the appeal of usage-based car insurance policies has come into sharp relief. According to a consumer sentiment survey published by J.D. Power in May 2020, the pandemic had 40 percent of consumers nationwide thinking about telematics and UBI because of the potential cost savings. A common question, among policyholders, has been, “Why should I pay the same premium as before, when I’m driving a faction as often?”

That question leads to telematics and to a UBI model, where drivers who drive more frequently or who are more reckless behind the wheel shoulder a greater proportion of the overall insurance pool because their risk levels are higher. At the same time, drivers who are safer and more cautious are rewarded with lower premiums, and drivers who simply aren’t spending much time on the road – whether because of a pandemic-forced closure or a job closer to home – can pay less without the hassle of cancelling their policies outright.

Insurance providers could benefit, too, in part because telematics can help with risk prevention. By notifying drivers when they are going too fast, when there is a risk of hydroplaning, or when a traffic jam is approaching, these data-tracking systems aren’t just a way for insurance providers to monitor their policyholders’ every move, but also a way to actively encourage safer driving and perhaps prevent policy claims.

While Ford said that UBI is likely “easiest to understand” in the context of automobiles and car insurance policies, he notes that telematics could play a role in other types of policies, too. He pointed back several years, to when John Hancock launched an “interactive life insurance” policy that gave policyholders the chance to get discounts on their premiums by wearing fitness trackers, hitting exercise goals, and logging healthy food choices. Home insurance providers, Ford said, will sometimes offer discounts to homeowners who have smart home technologies that can reduce the likelihood of a claim.

“Sometimes, people will be gone for a week on vacation, and the pipes freeze,” Ford said as an example. “When they come back, they have 10,000 gallons of water in their house. That’s a huge mess for everyone. It’s a terrible cleanup; it’s very expensive; people are sometimes out of their houses for almost a year while everything is getting torn out and put back together. Now, we’re seeing water flow sensors hitting the market. If water is going through the house at a greater-than-normal rate for a longer period of time than is normal, the pipe valve shuts so that water doesn’t run around the clock for three or four days.

“I think that there is potential for these types of telematics in the home to impact home insurance rates over time, as well as business commercial properties. It really just depends on what people’s imaginations can think of, in terms of what the potentials for loss are and how a sensor can communicate.”