Progressive’s Black Box: Is Big Brother Good for the Industry?

Some drivers in Minnesota will soon have an added passenger in their cars: their insurance company. Progressive Insurance Company is using so-called “black box” technology to offer drivers discounts based on how much, how fast and when they drive.

The pilot program, which is strictly voluntary, involves 5,000 Minnesota direct Progressive customers. The drivers will install a data-logging device provided by Progressive into their cars and then upload the data to the insurance company for up to 25 percent in potential savings.

The device, called the TripSensor, is the size of a matchbook and plugs into the On-Board Diagnostic port found near the steering column of most cars made after 1996. The TripSensor records mileage, the time of engine start up and shut down, and the speed at which customers drive.

“Anybody who tries the program, whether they share the data with us or not, receives a five percent discount at renewal,” said William Perry, spokesperson for Mayfield, Ohio-based Progressive. Drivers may receive an additional 15 percent discount depending on how far and at what times of day that they drive. An additional 5 percent discount is determined by the percentage of time consumers spend driving at or above 75 mph.

The device also records information on braking and acceleration for safety purposes that is not factored into the discount.

The pilot program was announced on Aug. 9, 2004, and became commercially available on Aug. 16. The customers who registered for the program, volunteers who purchased Progressive insurance over the Internet, are now receiving their TripSensor devices. Perry said that it is too early to tell exactly what kinds of savings customers can anticipate for participating in the program.

“The big advantage is that it gives consumers another choice in the way that they buy and use auto insurance,” Perry said. “If your driving pattern is such, you can take advantage of those discounts and you have the opportunity to save a pretty good amount of money.”

Progressive conducted a similar test involving 250 Minnesota drivers earlier this year. The company gave them a chip and a $25 incentive to try it for 30 days. The consumers then filled out a questionnaire about the program.

“The response from that test was very positive,” Perry said. “People really liked being able to have some more control over the cost of their auto insurance and they liked the information aspect of it, learning about their driving habits and seeing the statistics about their driving.”

Who will jump on the bandwagon?
Progressive is the only U.S. auto insurer applying the advanced “black box” technology to rating and underwriting, according to Dave Snyder, vice president and assistant general counsel for the American Insurance Association (AIA). But insurance companies are interested in what Progressive is doing.

“It’s something of interest to other insurers from a couple of standpoints,” Snyder said. “First of all, does this really help assess risk? Is this constant monitoring useful in terms of more accurately pricing automobile insurance and assessing risk? We’re going to be looking at it to see if it improves risk assessment.”

Perry thinks it will make Progressive rates more accurate. “Accuracy is a function of how much you know about a particular driver and vehicle,” he said. “We have certain rating characteristics that we use, like everybody else uses, to come up with a rate. But with this additional information, it will allow us to hone in even more and get a more accurate price for any individual driver.”

Perry said that Progressive has a history of using new technology to the benefit of its customers.

“We’re a company that is very innovation-oriented,” he said. “We see this as the next generation of innovative ways that we’ve used technology to help people save money.”

Snyder said that it is the use of the technology itself that is the larger issue. “This insurance field basically hasn’t changed that much in 50 years,” he said. “That’s what makes the Progressive experiment so interesting. This is an advanced application of technology to potentially rating and underwriting.”

No more eyewitnesses?
The technology is not exactly new. Many U.S. car manufacturers, including General Motors, have been installing Event Data Recorders (EDRs), designed to record information preceding a collision, for several years. But these “black boxes” don’t necessarily record the exact information that Progressive does in its TripSensor devices.

Snyder said that advanced EDRs can potentially record anything that involves an electric pulse in the vehicle, including airbag inflation, turn signals, windshield wipers and headlights. The data collected by EDRs was used originally in product liability cases to determine if airbags functioned correctly. But Snyder said that the data from Progressive, including speed and the information on braking and accelerating, has even more applications.

“We think that there is a huge value in collecting and using this data for safety research, and secondly, for liability claims settlement,” he said. “We’ll go beyond the inaccurate eyewitness testimony and interested parties and [find out] really what happened in collisions. They’ll collect information that you can use for real world evidence and [discover] what people and vehicles actually do in crashes as opposed to computer simulation or crash tests.”

Is it too 1984?
But who owns the information that recording devices collect? In the case of the TripSensor, Progressive does. Consumers voluntarily upload the data on their driving habits to the carrier.

Perry said that the data Progressive collects in the discount pilot program will not be misused. “The only thing we use the data for is to calculate that discount,” he said. “We’ll look and say, driver A traveled this many miles at this time of day, based on that we’re going to provide them a discount of x number. We don’t share that data with any other outside entities.”

Participation in the program will never increase a customers’ premiums.

Snyder said that privacy advocates are concerned about the black box technology and the potential for being wrongly used by insurers. He said that insurers should be very careful because of privacy concerns.

“I think the insurance industry has been very deliberate in this because if they try to go too far, it’ll create a reaction that will not only restrict insurer’s use of the data even on a voluntary basis, but it might even restrict the data for safety and claims settlement,” he said.

He said that legislation has passed in California and other states that determine data from EDRs belongs to the owner of the car. But law enforcement agencies can have access to the data under certain circumstances. Snyder did not see any big privacy issues arising out of Progressive’s program as long as they receive the complete consent of participating drivers.

“I don’t think there’s anything that really affects privacy negatively with respect to the use of this data for anonymous safety research purposes,” he said. “There’s no real privacy issue with respect to the use of black box data for litigation because any party can get exactly that same type of information today from depositions. But because it does involve tracking what people are doing, is this something that policyholders will accept and give their consent to?”

Norwich Union, an insurance company in the United Kingdom, believes that consumers are willing to trade privacy for lower auto insurance costs. The insurer is offering a pilot program for 5,000 drivers called “Pay as you Drive.” The black box installed in customers’ cars will relay information to the carrier automatically by making use of Global Positioning Satellite technology and a cell phone signal, according to Norwich’s Web site. Then customers are billed for their “usage” each month. The company will be able to know where and when customers are driving and exactly how they are driving.

Will agents get involved?
Perry said that he anticipates the Progressive pilot program to be successful. “We are planning on watching it closely, but we are optimistic that it’s going to be successful,” he said. “We don’t have states planned beyond Minnesota at this time but obviously if everything works out well we’d like to roll it out in other states.”
Perry said that although the program is currently only available to direct customers, he predicted it will eventually, pending the success of the program, be available through independent agents.

“There were a number of reasons we had to offer it online,” he said. “You do have to have computer access to be able to participate in the program because that’s how you share your data. By offering it on the Internet it allowed us to target more directly those customers that are more likely to be able to use it. And it helped keep our costs down for creating the test because we don’t have a lot of back-end training of agents and things at this time. But ideally we’d like this product to be available through all sales channels.”

Most independent agents were reluctant to talk about the discount program. One Minnesota agent who writes with Progressive, however, did say that he has deep concerns about the concept of monitoring driver habits.

“I personally do not think this is a good idea,” he said. “I think by doing something like that you are invading the privacy of people. Every once in awhile I speed or I probably do things that I shouldn’t and I think they’re trying to break down driving too specifically. How are they going to charge these things if you do speed or if you drive more miles to work or if you drive late at night? What are they going to do next?”