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.