“Auto insurance telematics, subject to proper oversight, could lower costs for safe drivers and replace unfair, non-driving factors used by many insurers today,” Doug Heller, CFA’s insurance expert, said. (Credit: metamorworks/Shutterstock.com)Auto telematics has the chance to give consumers lower, fairer prices while incentivizing safe driving behaviors, but “guardrails” are needed to prevent the data collected by these programs from being misused, according to the Consumer Federation of America’s (CFA) white paper, “Watch Where You’re Going: What’s Needed to Make Auto Insurance Telematics Work for Consumers.”
“Most auto insurers currently base rates, in part, on socioeconomic characteristics such as education, occupation, and credit history rather than exclusively on driving-related factors,” Michael DeLong, a research and advocacy associate with CFA and co-author of the white paper, said in a release. “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.”
Reviewing the state of auto telematics, CFA found that these programs have the potential to “usher in a new era in auto insurance pricing,” but insurers and third-party vendors must do more to explain and justify algorithms, demonstrate they are not unfair and how they ensure consumer privacy. Additionally, the consumer advocacy group reported that to build trust in these programs, state insurance departments should establish rules regarding the use of telematics, pricing transparency and fairness, and consumer privacy measures of the programs.
Where states could step in
In addition to concerns regarding how telematics programs’ algorithms operate — a tightly guarded trade secret — there is also concern among consumer advocates over how non-insurance, third-party vendors will be scrutinized as non-regulated entities. Regarding the third-party issue, CFA suggested they be regulated as advisory organizations in a manner akin to that of the Insurance Services Office.
To date, very few states have adopted rules regarding auto telematics programs. To assure auto insurance telematics improve the consumer experience, CFA suggested states should put some oversight measure in place, such as:
- 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 the 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 and oversight by both Consumer Financial Protection Bureau and state insurance regulators.
- Third-party telematics algorithm developers should be licensed as insurance advisory organizations and subject to state insurance department regulation.
“Auto insurance telematics, subject to proper oversight, could lower costs for safe drivers and replace unfair, non-driving factors used by many insurers today,” Doug Heller, CFA’s insurance expert, said in a release. “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.”
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