For many years, insurance companies that write personal automobile coverage used very conventional ways to develop the premiums they charged their customers. For decades the final cost of coverage was based on criteria such as:
- Driver age
- Geographic area (territory) of operation
- Miles driven
- Vehicle use (pleasure, business, farming)
- Marital status
And similar characteristics. For nearly as many years, insurance companies have longed for more sophisticated ways to create prices.
A couple of developments that have influenced pricing were the use of zip code information as well as credit-based insurance scores. However, even these criteria were still considered blunt pricing methods. In other words, companies still sought out to refine the ways in which they could classify drivers. The additional criteria were still considered too general to be accurate, resulting in the use of prices made superior drivers subsidize poorer risks.
As is often the case, technology has opened the door to viable methods to markedly change the way automobile insurance rates are developed. The latest answer is telematics; the use of, essentially, tracking devices that can pinpoint precisely how, when and where a vehicle is driven.
Increasingly insurers use voluntary programs that incorporate portable data recorders. These devices are plugged into a given vehicle and then it records information such as vehicle speed, braking, time of operation and miles driven. This information allows an insurance company to create rates that accurately reflect a given driver’s potential for loss.
Another step that is already available is the use of GPS technology that can also record exactly where a vehicle is driven. However, this level of information has sparked concerns for privacy. A number of states have created laws that limit the gathering and/or use of such information.
The issue to be prepared for is the continued, expanded use of tracking methods for creating insurance premiums, so remember…..someone’s watching.
COPYRIGHT: Insurance Publishing Plus, Inc. 2013
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