Many consumers are unhappy that car insurers use their credit histories in setting premium rates. Now an alternative is in sight—and some might like it even less. Insurers would be able to track how, when and where they drive.
Since late summer, car insurer Allstate Corp. ALL -0.12% has been talking to state regulators about helping to lead an industrywide effort to transition in the coming years from sizing up risk in applicants with factors including credit scores to largely using telematics to determine rates, the company and regulators said.
With telematics, insurers monitor policyholders’ driving behaviors either through smartphone applications or devices embedded in their vehicles. Insurers slice the tracking data to tailor individual rates.
While a switch could be unsettling to many people with privacy concerns, it would hold out the possibility of lower rates for vehicle owners who are excellent drivers or don’t drive that much, and who might now be overpaying for the risk they pose.
Allstate is a leading seller of policies that use telematics in conjunction with credit scores and other traditional pricing factors, and it has a unit, Arity, that sells telematics services to other insurers.
“There is an opportunity to encourage innovation in the insurance industry, and we want to start that dialogue with regulators and others, and be thoughtful about how we step into this over time,” Allstate Chief Legal Officer Rhonda Ferguson said in an interview.
“It takes collaboration across the industry to get there—from legislators and regulators creating clear and consistent rules for driving-based rating plans to insurers advancing telematics programs and customers using them,” Ms. Ferguson added.
Allstate’s championing of telematics is the latest development as state insurance regulators fulfill a pledge from last year to scour existing practices to identify those that might place minorities at a disadvantage. Auto insurers’ use of credit scores is one area of concern.
Most states permit insurers to use credit-based factors, but consumer groups have long maintained that the practice is unfair to low-income and many minority consumers because they are overrepresented in lower credit-scoring categories.
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The Biden administration is also scrutinizing car insurers’ pricing techniques.
Under the traditional pricing approach, insurers lump applicants into actuarial categories by such characteristics as age, gender, marital status, vehicle type and driving records, in addition to credit behavior. Many also use education and occupation, which likewise have come under fire as unfair to certain consumer groups. Actuaries have struggled to explain why credit factors work to predict claims activity, with some speculating that people with good credit habits have meticulous behaviors that make them cautious drivers.
While Allstate stands by its current approach as actuarially sound, “sophisticated, accurate and fair,” Ms. Ferguson said, telematics provides an opportunity “to improve the accuracy of insurance pricing.”
An Allstate spokesman said the insurer wouldn’t speculate on the degree to which any of the traditional factors would decrease in use in a shift toward telematics.
The technology has gained ground since it was introduced by Progressive Corp. about two decades ago. But less than half of new auto-insurance applicants enroll when given a chance, according to trade groups.
Just over two million of Allstate’s roughly 22 million total auto policyholders currently are enrolled. They are a big chunk of the approximately eight million individuals industrywide with telematics-connected cars, or less than 4% of the nation’s more than 210 million personal-auto policyholders, the National Association of Mutual Insurance Companies estimates.
Telematic devices track behavior such as hard braking and speeding, as well as hours of travel, location and total miles driven. Some programs also measure distracted driving.
That detail plays into why Allstate’s proposal might be a hard sell. “There are a lot of ‘ifs,’” said Pennsylvania Insurance Commissioner Jessica Altman, including the potential need for state legislatures to ban use of factors such as credit.
Many people are reluctant to try telematics because of data concerns or inertia, she said, with some dubbing it “Big Brother.” Working in telematics’ favor, broad data collection “is becoming more and more the norm for consumers,” she said.
Louisiana Insurance Commissioner Jim Donelon said, “There would have to be very strong consumer protections around what insurers can do with this telematics data….Who owns the data that is produced: the driver or the insurer?”
Another concern is whether telematics’ ability to zero in on location might “create new issues—for example, ‘redlining’ cars that drive or park” in certain areas, said District of Columbia Insurance Commissioner Karima Woods.
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