What Sprint’s entry into usage-based auto insurance means for you

Usage-based auto insurance plans have transformed from niche to mainstream products in the past several years. Now, technology available from wireless carriers will let auto insurers more easily set up these plans. So, how will this affect you?

What is usage-based insurance?

Usage-based insurance (UBI) programs monitor a driver’s behavior, such as miles driven and average speed. The technology was developed by Progressive in the 1990s, although the company waited until 2011 to launch Snapshot, its UBI product.

In the program, Progressive’s UBI device plugs into your car’s diagnostic port and tracks your mileage and driving habits. Although Progressive says your rates won’t go up for poor driving habits, you will receive a discount for low mileage and good driving behavior, such as not slamming on the brakes and not driving between midnight and 4 a.m.

Recently, other insurance companies, including State Farm and Allstate, have launched their own usage-based programs, but developing such technology had remained out of reach for smaller insurers -- until now.

Wireless carriers enter the field

Wireless service provider Sprint has rolled out technology that lets all auto insurers use its technology to track customers’ driving behavior. Sprint launched a pilot program with Esurance, and has opened the door to all insurers that are interested in licensing its technology.

“What Sprint is doing is providing insurers with a seamless experience to expand their offerings,” Sprint spokesman Randal Spolter says. “We’ve assembled all the necessary components together so that insurers have a single point of contact.”

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Verizon is getting in on the UBI game as well. In June 2012, the company bought Hughes Telematics, a provider of hardware and software services for in-car technologies, including vehicle navigation and tracking systems. Hughes’ technology is used in State Farm’s existing Drive Safe & Save UBI program.

ABI Research predicts the number of auto insurance consumers in the world who have UBI plans will jump from 1.85 million in 2010 to 89 million in 2017.

Why it’s important

Should consumers be concerned about the fact that their auto insurance companies are moving usage-based models?

“Using the number of miles driven and a driver’s safety record to help calculate auto insurance premiums is nothing new,” says Loretta Worters, a spokeswoman for the nonprofit Insurance Information Institute. “Both are taken into account in calculating premiums for traditional policies.”

Usage-based insurance differs from traditional insurance in that it monitors mileage and driving behavior on an ongoing basis, while traditional insurers rely on drivers’ reports of their mileage and accident histories to help determine premium ratings.

“Your driving record has only a handful of data points,” says Eli Lehrer, president of the R Street Institute, a nonprofit think tank. By using UBI, insurers “can get a fuller picture of a driver.”

For most people, the move to usage-based insurance is a good thing, because it means insurers will be able to better identify people who are unlikely to file claims and can lower those drivers' rates accordingly.

But what about the bad drivers?Currently, insurers that use UBI programs say they won’t raise rates on less-than-perfect drivers whose behavior is monitored. “That initially encourages people to try it out,” Lehrer says, but companies may switch tactics once UBI becomes more widespread. After all, Lehrer says, companies can afford to lower rates for good drivers only if they ultimately raise premiums for not-so-good drivers.

Some drivers also are concerned about privacy issues, as UBI devices track their driving behavior and locations. Lehrer thinks those worries are overblown. “It doesn’t strike me as hugely invasive,” he says. “If law enforcement really wants to track you right now, they already can.”

Overall changes to the insurance industry

The move toward usage-based plans will substantially change how the auto insurance industry does business.

Previously, insurers would rate drivers based primarily on demographic data, such as age and gender. They often would underestimate or overestimate a driver’s annual mileage and likelihood of filing a claim.

With usage-based plans, insurance companies can more accurately craft policies based on drivers' actual risks, according to the data collected by UBI devices. As a result, riskier drivers ultimately may pay more for auto insurance, Lehrer says.

Because many of these programs encourage consumers to monitor their own driving behavior online, UBI programs also may help people become better drivers. Supporters say the immediate feedback a UBI devices offers about a driver’s risks “may be more successful in changing bad habits,” Worters says.

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