Among economists, Pay-as-you-Drive (PAYD) automobile insurance has been an intriguing idea for a number of years. The idea is straightforward: Drive more, pay more. Proponents say PAYD can lower the social costs of driving—think carbon emissions and traffic congestion—by leading people to shoulder the true burden.
On the industry side, Progressive has been one of the most aggressive innovators with PAYD insurance. It first began offering a voluntary PAYD program called MyRate in six states in 2008. Three years later, thanks to inexpensive, if not quite cheap wireless technology, the idea is now available nationwide through an initiative called Snapshot. Progressive gives a discount to policyholders based on information about their driving habits collected over a month-long period. Drivers put a sophisticated little tracking device in their cars for six months. At the end of the first month, certain “good drivers” may be eligible for a discount of up to 30 percent based on that “snapshot” of driving behavior. (At the end of the six months, Progressive uses all the data to calculate a renewal rate.)
As Steven Levitt notes, the interesting part of PAYD insurance programs, which are voluntary, has always been how to structure the incentives for participation. The concern is that only low-mileage drivers will sign up.
The clearest winners are (low-mileage users), who can drive the same distance they used to drive and pay less. What’s less obvious is whether Progressive will be a winner; there are, in fact, a couple of situations in which Progressive could lose out. If all (PAYD) accomplishes is to give Progressive’s low-mileage customers the rate cut they deserve, then Progressive is doing little more than lowering its own revenues. It could, of course, try to compensate by raising rates on all its high-mileage (drivers), but then there’s nothing to stop (them) from buying…insurance elsewhere. (Of course, losing its riskiest customers to other companies might also prove profitable for Progressive.)
Where Snapshot is most likely to give Progressive an edge is if it can help the company better forecast the future liabilities it will be on the hook for. That means better predicting accidents. To do that, however, Progressive needs to get all kinds of drivers, not just low-mileage users, to try it and feed the data back to home base. To appeal to all drivers, Progressive has had to move beyond traditional economics and consider behavioral economics as well.
To encourage customers to test out Snapshot, Progressive draws from the lessons of overconfidence and loss aversion. Humans are overconfident creatures, especially when it comes to driving. Ninety three percent of people think they are above average drivers. Even among bad drivers, accidents are not the modal driving experience, and there’s always someone else to blame for them.
Snapshot is primarily a program about usage, but it’s sold as a program about “good driving.”
On its web site, Progressive doesn’t shy away from calling Snapshot “usage-based insurance.” But its media advertisements headlined by cheery customer service rep “Flo,” refer to driving behavior more generally. “Just plug it in and it keeps track of your good driving habits,” Flo explains. “So the better you drive, the more you save.”
What makes a good driver? The speed you drive at and the locations you drive to and from are not part of the equation. Taking speed off the table eases some customer fears since speeding is the most salient mark of good (or bad) driving. Taking driving location off the table eases fears of those who worry about privacy and whether Progressive is tracking their every move. The device doesn’t have a GPS.
Instead, “good driving” depends on 1) Time of day you drive, 2) Number of miles you drive, and 3) How hard you brake (“bad drivers” brake hard). What’s common about all three items? Drivers have very little control over them. When and how far your drive depends largely on where you live and work, which are both quite sticky in the short term. And how hard you brake is primarily an automatic reaction built up over years of commuting. For any single braking experience you can push the pedal more smoothly, but maintaining that consistency over an entire month if you are a hard braker is a bit like trying not to blink for a minute.
According to the Wall Street Journal, a Progressive executive admitted that one of these items predicts accident potential as well as all the usual demographic markers like age, gender and marital status. Although the executive didn’t say which one, the peak time for accidents is between midnight and 4 a.m. If there is one habit worth trying to change over your month with Snapshot, it could be the itch to party. At least think about taking a taxi or hitching a ride with your friend.
Progressive doesn’t think overconfidence, by itself, is enough to get people to try out Snapshot. So it has to remove any risk of losses by promising drivers they won’t pay any more for insurance than they are paying now. Freed of potential losses, overconfidence can kick in, prompting “good” and “bad” drivers to give it a shot and see what kind of a discount they get. After all, they can’t be penalized for any “bad” behaviors. But since Snapshot is about “good” and “bad” driving risk, not “good” and “bad” driving skill, Progressive doesn’t even care if you are involved in an accident while using the device since your risk profile is determined by calculations based on driving patterns. (Theoretically, you could be involved in a minor fender bender with Snapshot and Progressive would never know.)
In essence, Progressive doesn’t want a snapshot of your driving habits. It wants a snapshot of its overall customer base, assuming that base looks a lot like the overall car insurance market. It wants Snapshot to work less like a camera and more like a random sample. From that perspective, the success of economists’ preferred auto insurance depends on whether some non-economists can get the behavioral economics of offering the product just right.