Big Brother cutting insurance bills

By Insure.com

If you don't put many miles on your car, the insurance industry has plans for you to save money on your car insurance, too.

Car insurers have long offered low-mileage discounts based on your commuting distance to work or on your annual mileage. Now they're considering ways for you to pay for car insurance based on exactly how much you drive.

It's called usage-based car insurance, also known as pay as you drive. A device in your car tracks your actual mileage, and, come renewal time, your rate is calculated partly on your usage -- and potentially even on your driving habits and how aggressive you are on the road.

Some insurers have been working toward this moment for years. Progressive, for example, has been testing and refining usage-based programs since a 1999 Texas test. "We put our toe in the water," says Richard Hutchinson, the general manager of Progressive's MyRate program, the newest incarnation of Progressive's pay-as-you-drive program.

With MyRate, Progressive is going full-throttle into usage-based insurance. The program is available in Alabama, Georgia, Kansas, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Missouri, New Jersey and Oregon. The company plans to offer it in more states throughout 2009.

How it works

A device that plugs in under your steering column collects data on your mileage, when you drive, how often you drive and how you drive. That information is automatically sent to Progressive from the device via a cellular connection. Conventional factors such as your age, location, vehicle and driving record are still used in addition to usage in setting your car insurance premium.

"This empowers you to control your insurance costs," Hutchinson says. Savings can be as much as 60% on the liability and property-damage portion of your bill (that's if you're sitting at home most days).

However, it could also backfire: Someone who logs a lot of miles, drives like a crazy person or drives a lot after midnight (when accident rates are high) could see a 9% surcharge.

David Snyder, the vice president of the American Insurance Association, an industry trade group, notes that insurers have long based rates partly on miles driven, but one driver's miles can be very different from another's in terms of risk exposure. For example, driving 10 miles on a back road at midnight carries far more risk than driving 10 miles on a highway on a sunny day. Tracking devices pinpoint some of this risk.

An invasion of privacy?

Road ragers need not apply. Sudden braking and acceleration, such as speeding up more than 7 mph in one second, will boost your insurance rate under Progressive's program. Even if you drive in a relatively calm manner, you may simply not like the feeling that every time you slam on the brakes or go for a midnight ice cream run your car insurance rate is creeping upward.

"People have different views on whether it's an invasion of privacy," says Loretta Worters of the Insurance Information Institute. "But people are willing to do it for the rate reduction."

Computing the savings

The savings range will depend on your state. For example, Progressive's Alabama customers can see discounts of up to 40%, with no surcharge range, and have a "technology expense" of $5 a month.

Computing car insurance premiums to take into account how much you drive, when you drive and how you drive gets complicated. According to the 2008 rating manual filed by Progressive with the Alabama Department of Insurance, MyRate customers can fall into one of more than 400 usage-based insurance groups, depending on their driving habits. To be eligible for discounts, drivers must fall into one of the first 75 groups.

Progressive customers can check their "Trip Details Log" driving profile online, sort trips by date and type, and see their anticipated discount. They can also drop out of the MyRate program at any time and return to a standard policy if they don't like their expected new rate.

"You have to pay some attention because you could end up in a higher position," Progressive's Hutchinson says. "People are reducing their mileage, and this fits nicely. It's a good idea for some drivers out there. We're not trying to shove it at them."

In addition, you can choose MyRate for one vehicle in your household but not others. If you have a car that sits in the garage most of the time, MyRate would garner you large discounts.

Progressive holds three patents related to its usage-based system.

Continued: Other options

 1 | 2 | next >