Editor’s note: This item is excerpted from the whitepaper “Watch Where You’re Going:What’s Needed to Make Auto Insurance Telematics Work for Consumers.” The full paper is available for download
Based on a Consumer Federation of America review of current telematics programs and regulation of the programs, consumer protections need to be adopted in order to ensure that telematics programs encourage and benefit consumers in a manner that is fair, transparent, and does not threaten consumer privacy. Toward that objective, oversight of telematics should have the following components:
• Transparency of Data Collection
Often regulators, consumer advocates, and consumers are unable to determine the entire set of data that telematics devices are collecting. Mileage and a few other datapoints are often cited by carriers and vendors in their public statements and consumer facing disclosures, but our analysis of regulatory oversight and other research indicates there may be several other factors, including driving location, time of day of driving, weather during a commute, the types of roads used, and other data that may be gathered without full and clear disclosure. Consumers and regulators need to know all of the data points that insurers and third-party vendors collect.
• Standards for Data Collected and Used
There should be strict limits on the data that companies can collect and use. Specifically, regulators should allow, after regulatory review, only data that are demonstrably related to risk of loss for use in telematics programs. Short of that, where prior approval is not required of auto insurance rates and rules, companies should at least be required to provide the actuarial justification and a causative explanation for each point of data they use in a program. This means that it is not enough to say that a final aggregate scoring model is sound; instead, each component of the score – whether it is hard braking or apparent phone use, or any other factor – must be demonstrably related to risk. Further, third-party developers of telematics programs or algorithms should be subject to state insurance department oversight in a manner akin to advisory organizations and their products subject to review.
• Transparency of Algorithms
Regulators, policymakers, consumer advocates, and the public should be able to see how the algorithms work, what goes into the calculations and what comes out. In order to make this transparency meaningful, telematics-based rating algorithms should also be presented to consumers in plain language, while still clearly identifying all the inputs and the weight given to each component of the telematics program.
• Disparate Impact Tests
Insurers should also produce a disparate impact analysis of their telematics algorithms to identify the possibility that protected classes face less access or higher rates when the algorithms are applied in the market. Additionally, insurers and vendors must be required to take steps to obviate any disparate impacts of their telematics programs.
• Restrictions on Data Usage
Any data collected by telematics devices and compiled by companies should only be used for evaluating risk. Telematics data should not be used for anything else; it should not be sold or shared, except insofar as it is shared with the drivers themselves for the purpose of transparency or risk mitigation education. Consumers should have ultimate control over their information, and they should not be pressed to release their private data in order to realize their full savings.
• Oversight of Contributory Databases
If telematics data become available to insurers through an exchange or contributory database, the data should be treated as consumer reports subject to the FCRA, CFPB oversight, and state regulatory oversight. The full range of consumer rights available under the FCRA should apply to any contributory telematics database that insurers use for rating and underwriting.
• Freedom for Consumers
Once approved, telematics programs should be available to those who want to participate, but consumers should also be able to get coverage without participating in the telematics program. Consumers should be made aware of this right and be able to change their use of telematics whenever they want. Consumers should not be penalized for non-participation, and companies should not be allowed to provide a participation discount, though discounts for safer driving should be allowed. At least once per year customers should receive an accounting of what information has been collected and how it has been used to rate their policy as well as any other uses of the data.
• Telematics Programs Should Provide Ongoing Signals and Benefits to Consumers
Some programs collect data about a consumer during an initial test period, determine the rate, and then don’t update the “driving score” with any regularity. The most profound potential public benefit of telematics is its ability to signal to drivers the value of improved and safer driving. That means consumers should be able to learn from their mistakes and get better pricing as they improve their driving. If telematics programs just use, for example, one 90-day measurement every three years, then the consumer incentive to drive more safely is too tenuous to improve public safety, dramatically reducing the value of telematics.
