Telematics and usage-based car insurance explained

How usage-based car insurance works

Traditional car insurance pricing relies on averages: insurers group you with drivers who share your age, location, car and record, and price from that group's past claims. The NAIC explains that usage-based insurance adds information about your own driving, so the price can be more individual. It describes UBI as a type of auto insurance that tracks mileage and driving behaviors.

Most programs follow similar steps:

1. You enroll, usually when you buy or renew a policy. Some programs give a small sign-up discount.
2. Your driving is recorded for a set period or for as long as you stay in the program.
3. The insurer scores the data using its own formula.
4. Your price is adjusted at renewal or during the term, depending on the program.

The NAIC says mileage-linked discounts date back to the late 1990s. Today's programs are much more detailed.

How telematics data is collected

The NAIC describes three main sources:

How much data is collected depends on the technology and how much you agree to share.

What telematics programs track

Programs differ, but the NAIC lists these common data points:

• Miles driven. More miles usually mean more risk.
• Time of day. Late-night driving tends to carry higher crash risk.
• Location, through GPS.
• Rapid acceleration.
• Hard braking.
• Hard cornering, or taking turns too fast.
• Airbag deployment, which can signal a crash.

Some apps also look at phone use while driving and speed compared with the limit. Ask what your program measures before you join.

Types of usage-based insurance

The NAIC names several types of programs. It does not define each one in detail, and insurers use the names loosely, but they generally differ like this:

Distance-based and pay-as-you-drive programs mostly reward driving less. Behavior-based programs reward driving smoothly. See mileage and car insurance for low-mileage options.

Can telematics raise your car insurance rates?

It depends on the program, so read its terms before you sign up. Programs set their own rules on whether the data can only earn a discount or can also lead to a higher price. The NAIC's own example of usage-based pricing describes a driver who covers long distances at high speeds paying a higher rate than a driver who takes short trips at lower speeds.

Before you join, ask:

1. Can my premium go up because of the data, or only down?
2. What behaviors lower or raise my score, and how are they weighted?
3. Does the data affect only this policy, or could it be used if I switch insurers?
4. What happens if I leave the program partway through?
5. Who else drives the car, and will their driving count against me?

Privacy and your driving data

Telematics collects sensitive information, including where you go and when. The NAIC notes that tracking mileage and behavior has raised privacy concerns, and that some states have passed laws requiring insurers to disclose tracking practices and devices, and limiting what data they collect.

California is one example. Its rules for devices used to verify actual mileage say the insurer may use the device only to collect miles driven, may not collect or store the car's location (except for emergency road, theft, map or travel services), and must make participation voluntary.

Your driving data and consumer reports

Driving data does not always stay with the insurer that collected it. The CFPB notes that some consumer reporting companies may share driving behavior data with auto insurers. Its list of consumer reporting companies includes LexisNexis C.L.U.E. & Telematics OnDemand, where you can request a free report and freeze your report.

If you have used a driving app, a connected-car service or a telematics program:

1. Request your reports from the consumer reporting companies on the CFPB list. Our claims history guide explains how.
2. Review your connected-car settings in your vehicle's app or menu, and check what you agreed to share.
3. Read the program's privacy policy to see who receives your data and how long it is kept.
4. Dispute errors with the reporting company, as the CFPB explains you have the right to do free of charge.

How to get the most from a telematics program

If you decide to try usage-based insurance, a few habits help the data reflect your real driving:

1. Read the scoring rules first. Know which events count, such as hard braking or late-night trips, and whether speed is measured against the posted limit.
2. Set up the app or device correctly. Keep location and motion permissions on if the app needs them, and keep a plug-in device firmly seated.
3. Mark trips where you were a passenger if the app allows it, so someone else's driving is not scored as yours.
4. Leave more following distance. Smooth braking and acceleration are easier when you are not close behind the car in front.
5. Plan around late-night driving where you can, if your program counts time of day.
6. Check your score during the program, not just at the end, so you can spot problems early.
7. Keep a copy of the terms and any messages about your score or discount.

For families, some insurers offer telematics for teen drivers, which can give parents feedback on habits such as speeding and phone use. Rules differ by insurer and program.

Is usage-based insurance worth it?

It can make sense if you:

• drive fewer miles than most people
• rarely drive late at night
• brake and accelerate smoothly
• are comfortable sharing driving data
• are a young driver who wants a way to show safe habits (see car insurance for young drivers)

It may not suit you if you:

• drive many miles for work
• often drive late at night or in heavy stop-and-go traffic
• share the car with a less careful driver
• are uncomfortable with location tracking

Telematics is one of many car insurance cost factors. Your driving record, vehicle and coverage choices still shape most of the price. Compare programs at renewal, and check car insurance discounts for other ways to save.