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After more than a decade of experimentation, auto insurer Progressive Corp. (NYSE:PGR - News) is on the verge of a nationwide unveiling of a new type of insurance that charges customers based, in part, on real-time information about how well they drive.
With a small device that plugs into a car's onboard diagnostic computer, Progressive can measure when a policyholder uses their vehicle, how far they drive and how hard they brake. Customers who volunteer to install the device can get a markdown on their auto insurance of as much as 30% after 30 days, and lock in a discount when they mail the device back after six months.
In the highly competitive world of auto insurance, setting prices based on data gathered directly from a customer's car is a major step forward, and gives Progressive a leg up on its rivals—for now, at least.
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But rivals also see the advantages of using an onboard system, generically called "telematics," to gather more information on their customers, and are working on similar programs. In December, Allstate Corp. (NYSE: ALL - News) started offering a competing policy in Illinois, and State Farm and other insurers are experimenting as well.
Their work prompted Credit Suisse insurance analyst Vinay Misquith to warn in December that Progressive's temporary advantage may not last for long. As the other players enter the market in coming years, Mr. Misquith theorized they will collectively reduce profit margins on the safest risks, though he argued that the largest insurers—like Progressive, Allstate and State Farm—could "use their scale and better technology resources to more effectively price, gaining market share from smaller players."
Progressive's program is currently offered in about 30 states, and the company has been adding more every month. By April, the company plans to start running national ads touting the program, a change from targeting ads only at markets where the program, called "Snapshot," is currently available.
The Snapshot device combines a data recorder with cellular technology to allow Progressive to immediately compare its customers driving habits to data gathered from over a billion miles of testing. That allows the company to determine which participants in the voluntary program are less likely to get in an accident than traditional metrics might suggest.
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They might find that a young single man who doesn't drive as aggressively as his peers, someone who only drives on weekends, and others whose habits wouldn't be shown by the standard information that insurers gather about their customers.
"Auto insurance pricing has been based on trying to find characteristics about a person and their car that would indicate how they drive," said Brian P. Sullivan, the editor of Auto Insurance Report. "Telematics is about determining exactly how a person drives, when they drive, and how far they drive. The entire concept of how we priced auto insurance up to now is poised to go out the window."
One major hurdle that still needs to be cleared: convincing drivers to plug the monitoring device into their car. Progressive is attracting customers by promising that the price of their coverage can only go down, not up, if they participate--though the worst drivers will get no discount. Richard Hutchinson, Progressive's general manager for usage-based insurance, said one in four people who qualify to participate in Snapshot sign on.
Adam Hagerman, 27 years old, an IRS employee living in a suburb of Washington, tried a pilot program from Progressive called MyRate in 2008, and came away a big fan of allowing the company to track his movements. After the company started gathering his data, he got a rate decline of about 15%.
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"It helped me prove that I truly was a great driver," he said. "If I was a bad driver, I would have hated it."
Mr. Hagerman switched when he and his girlfriend, now his wife, got on the same policy, because of her poor driving history.
"I knew the program wasn't for her," he said.
Some consumers remain skeptical. Mr. Sullivan, who has been touting the advantages of telematics for years, said he would never agree to install such a device in his own vehicle.
"But I'm 53 years old, not 23," he said. "Privacy is a quickly shifting standard, and people are giving up more of it all the time."
Write to Erik Holm at [email protected]