A California car insurance reform that actually makes sense

Adam B. Summers, The Orange County RegisterOrange County Register

A bill under consideration in the state Legislature would allow Californians an opportunity to claim a new deduction on their auto insurance rates — but they would have to give up a bit of their privacy to do so.

Assembly Bill 311, written by Assemblymember Tina McKinnor, D-Inglewood, would allow insurance companies to utilize telematics — driving data recorded and transmitted through smartphone sensors and apps or a device that plugs into a vehicle — to better determine driver risk and offer premium discounts to good drivers. Participation in such programs would be purely voluntary and revocable, so insurance companies could not require anyone to utilize it. California is the only state in the nation that does not currently allow the use of telematics in the auto insurance industry.

That is primarily due to Proposition 103, narrowly passed by 51% of voters in 1988, which strictly regulates the insurance industry in California. In both the home and auto insurance markets, it has also stifled technological innovation, including the use of telematics, leaving California’s insurance industry decades out of date.

In addition to the potential cost savings to both consumers and insurers, there is evidence that the financial incentives of such usage-based insurance programs may lead to better driving. One study found that participation in these programs resulted in significant reductions in speeding, distracted driving and hard braking, though it should be noted that the study was conducted by telematics service provider Cambridge Mobile Telematics. Another found a 15%-21% decrease in handheld phone use while driving, though that study was also backed by the insurance industry. While the academic literature is not quite as settled and more research needs to be done, it nonetheless suggests that the use of telematics holds some promise for improving driving behavior, particularly when feedback is provided to drivers and engagement is high.

Of course, anytime consumer data is being collected, there are serious privacy concerns. This could include data on not only speed, acceleration, braking and phone use but also location, time of day and device permissions or other information. First, the good news. The legislation does make some earnest attempts to protect consumer privacy. Insurers and third-party telematics providers may not sell consumers’ data or use it for marketing or any purposes other than determining insurance rates.

Moreover, according to the bill, “A governmental entity shall not collect, receive, retain, access, use, disclose or obtain telematics data, except for deidentified, aggregated telematics data, which shall only be used for roadway safety analysis, infrastructure planning or crash prevention research as long as the data and derived outputs cannot reasonably identify an individual, vehicle, telematics device or trip. A governmental entity shall not collect, receive, retain, access, use, disclose or obtain identifiable trip-level telematics data, identifiable precise geolocation data, identifiable origin and destination data or any other linked telematics data regulated pursuant to this article.”

The problem is that some of these terms are vague and may be unenforceable, particularly since insurers cannot be held liable for the improper use of data by third-party telematics providers unless it can be proven that they knew about such abuses and then allowed them to persist.

In addition, while the legislation demands that telematics data be “deidentified,” it is all too simple to reconstitute that data, thereby jeopardizing one’s privacy.

“Behavioral and location data cannot be meaningfully anonymized,” a coalition of consumer and privacy organizations cautioned, as quoted in a legislative analysis for the Senate Privacy, Digital Technologies, and Consumer Protection Committee. “Telematics data, which captures daily driving patterns between home, work, school and other regular destinations, creates a behavioral fingerprint that survives the removal of direct identifiers.”

This may be a case in which the horse has already left the barn, however. People sacrifice their digital privacy every time they use smartphone apps, visit websites, use software programs or utilize fitness trackers to help improve their health (oftentimes in exchange for financial rewards from health insurers).

But there does not appear to be any uproar in the 49 states where telematics data is utilized for auto insurance. Consumers should be aware of the risks and tradeoffs of giving up their personal data but, ultimately, they should be free to make the decision whether it is worth it to potentially lower their rates (and maybe even improve their driving behavior) — just as they are in every other state.

Adam Summers is a columnist, economist, and public policy analyst, and a former editorial writer for the Orange County Register / Southern California News Group.