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Not everyone will benefit from the pay as you go system, but it still only represents a fraction of the car insurance options available. Consumer watchdog groups have some very strong reservations about pay as you go insurance despite benefits beyond auto insurance savings.
Pay as You Go Explained
There are many different forms of pay as you go insurance through different auto insurance providers, also called telematics-based insurance, but the basic principle is the same.
Auto insurance providers use a myriad of factors to determine a driver’s risk, and pay as you go is a new way to track that risk.
Usually, a driver’s risk is assessed based on information gathered from three different sources: driver-supplied information, looking at past history such as driving records and forecasting risk through correlation data such as school grades or a credit score. However, pay as you go devices supply data for some of those risks, rather than relying on consumer information, past history or traditional behavior markers.
In most pay as you go programs, drivers must install a device into the onboard diagnostics port of their vehicle. This is generally where auto mechanics and parts supply stores will hook a vehicle up to a computer. This is so the computer can communicate with a vehicle in order to read error codes if a check engine light comes on or to receive operational information from the engine to diagnose problems. The device records information while it is attached to the vehicle, such as the driving habits and the amount of miles driven. The device then transmits that data back to the insurer.
There is generally an initial small discount for installing the device, around 3% to 5%, and then those drivers who are shown to drive fewer miles or who drive in a safer manner, are rewarded with further discounts. One of the providers of a pay as you go program claims that some drivers can realize savings of up to 30% off their premiums.
Some programs just track mileage while others record driving behaviors such as how hard a driver takes turns and how often a driver has to quickly apply the brakes. While auto insurers have always used mileage and a driver’s past record to set premiums, pay as you go devices pin the numbers down in exact detail. Prior to the devices, auto insurers could only rely on customer supplied data, which isn’t very accurate. While pay as you go auto insurance is not available in every state, it is a trend that is catching.
Generally, there are a few qualifications that must be met in order to qualify for one of the programs. Each provider has its own qualifications, but a big prerequisite that is an absolute necessity is the presence of an onboard diagnostic reader (OBDII).
Thanks to government legislation in 1996 aimed at emissions standards, onboard diagnostics have been standardized for over 15 years, according to the OBDII homepage. Vehicles older than 1996 may have onboard diagnostics, but the OBDII plugs might not be compatible with current insurance plug-in devices. Furthermore, some pay as you go programs are only available on vehicles that support OnStar capabilities.
On board diagnostic devices are great for those who drive only a small amount and who generally have a good driving record.
Drivers are usually screened prior to an invitation to attempt qualification. Drivers who have many accidents and violations, and those who drive a large number of miles every day will also likely not qualify.
Who Will Benefit
Pay as you go auto insurance has enjoyed increased participation as people look to trim budgets. Some might have been laid off from work or working less, so they don’t drive as often. Others might be looking for further discounts for good driving behaviors.
Essentially, any driver who proves to be less of a risk in filing a claim through the information transmitted from the device will likely benefit. Low mileage reduces the chances of being in a car crash, and safer driving habits lower risk as well.
Further information that is sent from the devices might include the time of day that driving occurs. Driving at night is considered to be more dangerous, so those who don’t really drive their vehicles at night will also likely benefit.
Some of the insurance providers who offer pay as you go auto insurance programs have a waiting period before determining if a driver will be approved for the program. For instance, one program requires the device to be installed for 30 days before approving or disapproving the driver based on the data from the device.
Who Will Not Benefit
Critics charge that the devices unfairly exclude those who are forced to drive at night, such as those who work the graveyard shift, according to a Daily Finance article.
Each program has its own rules for when a driver can operate his or her vehicle in order to qualify for the discount. Furthermore, those who travel many miles every day, week, or year will also probably not qualify.
There are usually different levels of savings based on mileage.
For instance, one provider offers a 20% discount for those who drive less than six miles a week, but there is no discount for anyone who drives more than 10,000 miles a year, according to the Oregon Department of Consumer & Business Services. Another pay as you go provider offers six different discounts based on mileage, from a 50% discount for drivers who have annual mileage under 2,500 to a 5% discount for an annual mileage between 12,000 and 15,000 miles.
Also, drivers who are proven to be poor drivers also will not likely qualify. If the device detects too many hard turns or too much hard breaking, then that driver might not qualify for the program. Auto insurance companies that use pay as you go programs claim that their devices are not used to penalize drivers in any way, beyond losing the ability to be in the program. Basically, drivers supposedly do not receive higher rates if the device detects risky driving.
While speed and location are not yet part of the recorded data, they could be added as other factors used to determine a driver’s risk through devices in the future.
Currently, auto insurance companies do factor in a driver’s geographical location when factoring risk and setting premiums, citing the fact that some areas have high rates of accidents and theft.
Criticism by Consumer Groups
Many drivers will not want to use a device that may seem like an invasion of privacy, but groups like Consumer Watchdog feel that the devices have a greater potential for invasion of privacy than most realize. One such invasion might be the ability of the recorded data to be subpoenaed in court.
Citing examples of the use in court of toll road data from drivers enrolled in FastTrack programs, consumer group critics fear that the devices will record much more information beyond mere mileage than a driver would car to have known. Such data has uses and applications in divorces, criminal investigations, political vetting, lawsuits and more. Once the devices record information such as the places drivers visit, when they go somewhere, and how they drive, then drivers will be experiencing a great invasion of privacy, according to consumer groups.
Others also fear hackers and data that can be tampered with. These fears are valid for both the driver’s personal data and the data banks of the insurance company as a whole.
While detractors fear abuses of the data, pay as you go insurance providers have some unlikely allies in environmental activists. They claim that pay as you go devices will reduce the number of miles driven in the country in a big way as drivers cut down on car usage in order to save money. Fewer miles driven lead to fewer emissions and less greenhouse gases released into the atmosphere. Other similar benefits would be decreased oil consumption and slower vehicle depreciation.
Other proponents also feel that pay as you go programs will help to make driving safer as there are fewer vehicles on the road and drivers are more likely to drive in a careful manner. Similar to the reduction in vehicular deaths seen after speed limits were decreased in the 1970s to conserve gas, perhaps such devices would again lower the rate of casualties and deaths on the nation’s roadways.
Both sides of the argument have valid points. While the pay as you go users are not large enough to generate statistics proving one point or another, the movement certainly is growing.
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