A new technology gathers momentum, and a shadow of doubt quickly clouds over. Sound familiar?

Some car owners reported a spike in auto insurance rates after installing mobile apps and dongles that track telematics data i.e., detailed driving behavior. A lawsuit was filed against General Motors, LexisNexis, and Verisk for selling the data to insurers. Soon, there are questions about where the industry is headed.

Auto Insurance Needs to Evolve

In this age of AI, it does not take an industry expert to envision connected cars, telematics apps, and usage-based auto insurance. But these technologies are new and yet to make real inroads. Most auto insurance policies are underwritten today based on more traditional risk criteria. These criteria could vary from state to state but largely cover areas such as: location, car make, insurance history, driving records, gender, age, marital status, home ownership, education, occupation, and credit history.

As you can tell, many of these factors have little to do with cars or driving. Yet, auto insurers continue to use them to make approve/decline decisions and set premiums.

Credit history deserves a deeper dive. A Bankrate.com report finds that, on average, drivers with poor credit pay 118% more for full coverage car insurance than those with excellent credit ($4,801 vs $2,200).

Compare that statistic with risky driving. Drivers with a DUI conviction pay an extra 70% on average, according to a Forbes Advisor study. Drivers with speeding tickets only pay an additional 22%, and those who cause an accident pay an extra 42%.

Drivers today are penalized more for not maintaining good credit than for risky driving behavior. A handful of states — California, Hawaii, Massachusetts and Michigan — ban the use of credit history in setting auto insurance rates. For a vast majority of the population, however, their credit report is a critical factor in how they are evaluated by auto insurers.

The equitability of this practice has been questioned from time to time. An FTC study showing the correlation between credit scores and auto insurance claims is often cited in making the case: If non-driving criteria were not used in pricing, it could lead to higher rates for everyone, including those with clean driving records and good credit.

AI Can Transform Auto Insurance and Our Roads

Given the overall state of the auto industry, the adoption of telematics and the expanding use of AI has great potential for positive change.

Lenders make decisions based on borrowers’ credit history. Life insurance policies are issued based on detailed health and prescription records (and driving records, too). Does it still make sense for auto insurance rates to be based on credit history, marital status, and education? Are we better served by basing rates on driving behaviors like speeding, braking, mileage, and mobile use behind the wheel? 

Telematics data and AI have led to safe driving mobile apps that could improve driving behavior with real-time feedback to drivers. This could not only lower claims and insurance rates but also make roads safer, an appealing prospect for drivers, insurers, and the population at large.

A Holistic Approach is Needed to Put Things in Perspective

Sizing the full impact of telematics needs rigorous analysis. Updating the FTC study, which dates to 2007, would be a good start in answering some key questions:

What are the implications of setting auto insurance rates based solely on driving behavior and other direct attributes? Could controversial surrogates like credit history be eliminated altogether, making the auto insurance industry truly risk-based and inclusive? What would be the effect on road safety? What guardrails can ensure a win-win-win ecosystem for consumers, insurers, and the population at large?

There is certainly the issue of safe drivers with clean driving records who are seeing a hike in rates after sharing their driving data. Before blaming it all on telematics or AI, it would be worthwhile to investigate the changes in the non-driving facets of their lives, especially credit history. Besides, car insurance rates overall are at a 50-year high, driven by accidents, weather events, and labor shortages.

Responsible AI Is the Way Forward

No force can stop an idea whose time has come. The use of telematics and AI in setting car insurance rates is here to stay.

Like many new technologies, telematics and AI have some bumps in the road to negotiate. Concerns around data privacy and customer consent need to be addressed fair and square with responsible AI and guardrails.

The industry will adapt and learn. The use of telematics data will evolve and mature. And responsible AI will transform auto insurance.

To learn more about how insurance industry is getting transformed with data and AI click here.