How insurance companies are using technology to better assess how risky customers might be

The basic idea is that if you drive more safely, you have fewer accidents and insurance companies like that. Some of my students might recall one of the lessons from the supply and demand game. That was that one condition for markets to work optimally is that buyers and sellers have equal access to information. When they don't, markets won't work as well as they should.

For instance, in used car markets, the sellers know alot more about the product than the buyers. Economists have studied the problems this causes in the "market for lemons" research. If you want to sell your used car for $1,000, some people won't believe it is worth it. So they only offer maybe $800. If you believe your car is worth $1,000, you won't sell it. Then there are not enough sales in that market and the quantity is too low or sub-optimal. And many of the cars on the market are lemons.

But in insurance markets, buyers know more than the sellers. You know how risky you are but the insurance companies don't. Insurance companies want your premiums to reflect your risk. The riskier people need to pay higher premiums. If insurance companies can learn more about your driving habits, they can know better what to charge you.

See Insurers Turn to Technology to Woo Drivers by Lacie Glover of NerdWallet. Excerpt:

"Here’s a look at what insurers are doing today — and what they might try next.

1. Tracking driving for discounts, rewards

Many major insurers now offer telematics, technology that collects information about your driving behavior, in exchange for discounts or rewards.

Progressive was first, having launched its telematics-based program “Snapshot” in 2011. Customers who plug a device into their cars’ diagnostic ports to allow the company to monitor their driving can earn discounts. The technology — which tracks data like acceleration, hard braking, time of day and how much you drive — is also available in an app.

Other insurers that track driving behavior reward safe drivers with cash back, freebies or a combination of rewards and policy discounts. Often, drivers get a discount simply for opting in. While many companies say that driving behavior is monitored solely to determine discounts, Progressive might increase rates if your data show unsafe behavior.

2. Setting prices based on your (actual) driving

Auto insurers’ use of demographic factors, such as age, gender and marital status, when setting rates isn’t exactly popular with drivers.

A start-up, Root Insurance, is trying a new model: Pricing based on how you drive, which could save money for safe drivers. The insurance, currently available in 19 states with plans for five more, tracks driving behavior during a two- to six-week “test drive” before giving you a quote.

The company still considers some demographic factors, but it isn’t as interested in your personal details, says CEO and co-founder Alex Timm. “There’s not really a ‘great driver’ demographic — we find them across the country, in all sorts of situations,” Timm says.

Other companies are pricing coverage based on how much you drive. In select states, MetroMile, Allstate and Esurance, for example, offer policies where drivers pay a base rate, plus a per-mile rate.

3. Evaluating driving to curb bad habits

Beyond offering discounts to customers who opt into monitoring programs, insurers want to make you a better, safer driver. Depending on the program, drivers may get immediate feedback through in-app driving reports and scores, or even from devices that beep when drivers brake hard or turn too sharply.

Insurers are also targeting distracted driving, which was reported in 9% of fatal crashes in 2016, according to the latest data from the National Highway Traffic Safety Administration. Because crashes often result in claims, insurers hope to see a decrease by monitoring cell phone use, a common driving distraction.

In addition to tracking how you drive, apps from Root and AAA can tell if you’re using your phone while you drive, which will have an impact on your rate. Arity, a subsidiary of Allstate, is working to bring this capability to existing monitoring programs at Allstate and Esurance."

See also The EU Says Insurers Can No Longer Discriminate On The Basis Of Gender. Woman are generally safer drivers than men, so insurance companies charge men higher premiums. But the EU said they could no longer do this.

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