Susan Kuchinskas looks at how US state law can hinder insurance telematics.
Insurance carriers and telecoms are rushing to market usage-based insurance (UBI) solutions that calculate risk and set rates based on individual drivers’ behavior. But some US state regulations stand in the way. In California, for example, when there’s a conflict between commerce and consumer protection, consumer protection usually wins.
“You want a rating structure that’s as transparent and intuitive as possible to the consumer so they understand what they’re doing that’s driving the rate,” says Joel Laucher, deputy commissioner for the State of California Department of Insurance. “You also want reasonable stability in the rate, something an individual can budget for.”
It’s certainly not the case that Californians are averse to technology. Obviously, the home of Google and Apple runs on technology. Nevertheless, its Department of Insurance is way behind the curve when it comes to insurance telematics. “Perhaps the most prescriptive law of all for rate regulation is in California,” says Eric Nordman, director of regulatory services and CIPR for the National Association of Insurance Commissioners, “yet they welcome the use of telematics.” (For more on US regulations and UBI, see Insurance telematics: US state regulators tackle UBI and Telematics and UBI: The regulatory opportunities .)
Permissions and prohibitions
California Proposition 103, passed by voters in 1988, requires that personal automobile insurance rates be determined using the insured’s driving safety record, number of miles driven annually, and the number of years of driving experience as the primary ratings factors.
In 2009, regulations for using the actual number of miles driven, known as pay-as-you-drive (PAYD), were enacted as a voluntary option for California drivers. Telematics devices to collect actual mileage are specifically permitted. But collecting additional information, such as when, where or how the car is driven, is specifically prohibited.
Even PAYD conflicts to some extent with the State of California’s goal for rate stability, Laucher says: “It’s measurable and to some degree within the insured’s control, but it could cause rates to be less stable if your driving changes from year to year.” The sticking point, according to Laucher, is making sure higher rates for driving more miles are fair: “We’d like to consider things that are in the consumer’s control, like the driving safety record.”
For example, some pay-how-you-drive (PHYD) programs use the time of day driven as a ratings factor; many insurers find that driving at night, especially in the wee hours, is more dangerous. But Laucher points out that someone who works the swing shift has no control over when she drives, and she’s probably a safer driver than someone driving home from a party, so it’s not fair to ding her with a higher rate.
The state of PAYD
California could be the most highly regulated state when it comes to setting insurance rates. Insurers have to apply for and receive permission to change rates. When the state initiated PAYD, Laucher says, several consumer groups raised privacy concerns about including any PHYD elements. Ratings factors such as where the car is driven and the time of day could lead to tracking of consumers, the groups argued. (For more on tracking, see andTelematics and privacy: The impact of ‘do not track’ proposals.)
Laucher says that the Department of Insurance also needs to verify the credibility of the PHYD data to determine that it is a valid way of setting rates. How California could do that is still to be determined. “Hopefully, we’d be able to compare data from multiple companies,” he says. Using data from other states is another option.
To date, PAYD is being introduced incrementally in California. At this point, when most insurance companies don’t have telematics devices available, introducing new ratings factors isn’t a priority for the California Department of Insurance. That could change fast, with companies like Sprint announcing turnkey insurance telematics offerings.
Laucher says that not many insurers wanting to launch telematics offerings are courting California. If California did initiate rule making to address insurance telematics, he says, “It would be driven by insurers requesting such a change because, in theory, their consumers are asking for it.”
Susan Kuchinskas is a regular contributor to TU.
For more on insurance telematics, see Special report: Insurance telematics.