Insurer Practices/Profits

New White Paper Released: Auto Insurance Telematics Programs Require New Consumer and Privacy Protection Standards to Achieve Safety and Pricing Promises

“Watch Where You’re Going” Details Potential and Pitfalls of Auto Insurance Programs That Use Real-Time Driving Data

Washington, D.C.—Auto insurers are, increasingly, monitoring the driving habits of consumers through telematics systems that use consumer-generated driving data to calculate auto insurance premiums. A new white paper released today by the Consumer Federation of America (CFA) details the potential benefits and pitfalls of auto insurance telematics and identifies a series of consumer and privacy protection standards needed to ensure that these programs benefit policyholders in advance of any wider adoption of telematics.

In the paper – Watch Where You’re Going: What’s Needed to Make Auto Insurance Telematics Work for Consumers – CFA explores telematics programs’ promise of reducing the number and severity of car accidents and incentivizing safer driving, as well as the significant possibility that these consumer data harvesting programs increase insurer opportunities to profit at the expense of their customers. Without effective oversight, telematics programs could result in unfair pricing, improper use of personal information, racial and ethnic discrimination, and data insecurity, among other concerns detailed in CFA’s paper. CFA has distributed the paper to the nation’s state insurance commissioners and the Federal Insurance Office.

“Auto insurance telematics, subject to proper oversight, could lower costs for safe drivers and replace unfair, non-driving factors used by many insurers today,” said Doug Heller, CFA’s Insurance Expert. “But before we let insurance companies ride shotgun every time we get behind the wheel, we need guardrails in place, so telematics is not just a wild west of data harvesting, unfair discrimination, and unjustified pricing.”

In Watch Where You’re Going, CFA drew three overarching and intertwined conclusions:

  1. Telematics programs have the potential to usher in a new era in auto insurance pricing that would lower costs for safe-driving Americans and incentivize safer driving generally;
  2. Insurers and the third-party vendors that develop telematics systems must do much more to explain and justify their algorithms, demonstrate they are not unfair, and ensure consumer privacy, and;
  3. State insurance departments must establish rules regarding use of telematics, pricing transparency and fairness, and consumer privacy to build confidence in these programs.

The paper highlights the fact that very few states have adopted any rules for the use of telematics in auto insurance, which is also sometimes referred to as “usage-based insurance (UBI).  CFA, after detailing the various potential problems and abuses of unchecked telematics programs, urged strong oversight of insurance telematics by state regulators and the adoption of several consumer protections, including:

  • Insurers must demonstrate and explain the actuarial basis for the data to be collected and used as part of a telematics program;
  • Insurers must obtain informed consumer consent for use of consumers’ data and shall not use, sell, rent, or share telematics data for non-insurance purposes;
  • Insurers must test for and minimize disparate impact on protected classes such as race and ethnicity in the offer and application of telematics programs;
  • Consumers must be able to review all collected data and access the data for use in claim settlements;
  • If telematics data are shared with or among carriers through a contributory database exchange, the exchange must be subject to the Fair Credit Reporting Act (FCRA) and oversight by both Consumer Financial Protection Bureau and state insurance regulators, and;
  • Third-party telematics algorithm developers should be licensed as insurance advisory organizations and subject to state insurance department regulation.

“Most auto insurers currently base rates, in part, on socio-economic characteristics such as education, occupation, and credit history rather than exclusively on driving-related factors,” said Michael DeLong, a Research and Advocacy Associate with CFA and co-author of the white paper. “Telematics programs could move away from those harmful practices and really help consumers, but that means insurers must stop using these non-driving factors and demonstrate that telematics do not create different forms of unfair discrimination in the market. States must step up and ensure that auto insurance telematics improves consumer outcomes without making customers vulnerable to new abuses.”

Michael DeLong, 925-708-1135
Doug Heller, 310-480-4170