Are your teenagers skyrocketing your family auto insurance costs?
Are you fearful of the day your teenager is added to your auto policy?
Obtaining a drivers license is a great experience and memorable day for a teenager or young adult. This is a right of passage for teenagers as they get older and want to exercise independence, however there is nothing in nature, statute, or the Ten Commandments that requires this privilege to be at your expense. But more often it is….
It’s no secret that teenagers and certain groups with historic poorer driving experience are charged a higher auto rate as a group. It’s your job as a consumer to shop around and find the best price and protection. We recommend specific insurance shopping patterns.
It doesn’t have to be skyrocketing prices…
Usage Based Insurance
Usage-Based Insurance (UBI) is a recent innovation by auto insurers that more closely aligns driving behaviors with premium rates for auto insurance. Mileage and driving behaviors are tracked using odometer readings or in-vehicle telecommunication devices (telematics) that are usually self-installed into a special vehicle port or already integrated in original equipment installed by car manufactures. The basic idea of telematics auto insurance is that a driver’s behavior is monitored directly while the person drives.
These telematics devices measure a number of elements of interest to underwriters: miles driven; time of day; where the vehicle is driven (GPS); rapid acceleration; hard breaking; hard cornering; and air bag deployment. The level of data collected generally reflects the telematics technology employed and the policyholders’ willingness to share personal data. The insurance company then assesses the data and charges insurance premiums accordingly. For example, a driver who drives long distance at high speed will be charged a higher rate than a driver who drives short distances at slower speeds. With UBI, premiums are collected using a variety of methods, including utilizing the gas pump, debit accounts, direct billing and smart card systems.
If your teenager is a “good driver” and doesn’t act recklessly we recommend you look at Usage Based Insurance (UBI). For example, Shapshot by Progressive or Metromile both have apps which would sample the experience. But the basic premise is that you would have a device attached to your car that monitors your driving habits, time of day, speed, distance, etc.
The pricing for UBI deviates greatly from that of traditional auto insurance. Traditional auto insurance relies on actuarial studies of aggregated historical data to produce rating factors that include driving record, credit-based insurance score, personal characteristics (age, gender, and marital status), vehicle type, living location, vehicle use, previous claims, liability limits, and deductibles. Premium discounts on traditional auto insurance is usually limited to the bundling of insurance on multiple vehicles or types of insurance, insurance with the same carrier, protection devices (like airbags), driving courses and home-to-work mileage.
Policyholders tend to think of traditional auto insurance as a fixed cost, assessed annually and usually paid for in lump sums on an annual, semi-annual, or quarterly basis. However, studies show that there is a strong correlation between claim and loss costs and mileage driven, particularly within existing price rating factors (such as class and territory). For this reason, many UBI programs seek to convert the fixed costs associated with mileage driven into variable costs that can be used in conjunction with other rating factors in the premium calculation.
This means if your teenager is a conservative and defensive driver, this is a good way to collect the data to show your insurance company with real data, that your son or daughter is best in class driver and much better than his/her age might suggest. Or if the car sits in a parking lot at school almost all day and might bring the costs down as well. This will allow the insurance carrier to adjust the exposure and frequency of loss information. This option makes most sense for teens and adults with high maturity levels and good driving habits.
Challenges of UBI
We all think we are great drivers, but this can’t be true. Based upon a survey we conducted of 200 people, the data suggests only 1 of 200 was “honest with themselves” and admitted to being a bad driver. The data suggests that people either won’t admit openly about being a bad driver or poor habits behind the wheel or the survey was biased as it was populated with some inherently “dishonest” people….
The reason why we are discussing this survey and the results is about self awareness. To participate in good risk management or truly lower your total cost of risk you must be aware of your exposures. Self awareness relating to driving is something to be honest with yourself about if you are considering UBI. The downside of failing to be self aware is your insurance costs night go up to match your or your teenagers driving behavior.
Insurers like to see policyholders retaining risk so they know interests are aligned. If you pair higher deductibles with UBI it might be a winning combo but again self awareness is a key. Questions to ask yourself include: Can you afford to increase your $500 to a $1000 deductible ? Do your family driving habits warrant an increase in risk ? What is your risk tolerance?
Please recognize the likelihood of an accident increases when you go from 2 to 3 drivers now that your son/daughter is on the road, even though you may still only have 2 cars. The mileage most likely increases or time the car is parked or unused decreases as you add drivers. As mentioned above that the traditional way how your insurance company is viewing the risk.
Therefore think carefully about these approaches before implementing. Please use the test applications from UBI insurers to determine what is right for you. Please also review our discussion on deductibles to understand the thought process.
If you and your family are truly best in class drivers, this maybe a way to save money for you and reallocate to your deductible or other investments.
UBI is poised for rapid growth in the U.S. According to SMA Research, approximately 36 percent of all auto insurance carriers are expected to use telematics UBI by 2020. Based on a May 2014 CIPR survey of 47 U.S. state and territory insurance departments, in all but five jurisdictions – California, New Mexico, Puerto Rico, Virgin Islands, and Guam – insurers currently offer telematics UBI policies. This is a growing market and will be considerably more prevalent as those who have better risk management and loss prevention measures will be able to collect more data on their own behaviors and use to their own benefit. Let’s face it cars are getting more expensive to replace and fix with all this great new technology.
The money in premiums you can save may help pay for a higher deductible, future children added to the policy, or go towards your new dream car. Although investing, saving, or using the money towards other debt/expenses is the smart way to go.