What went wrong with data-driven car insurance – and how to fix it

Auto insurance is changing. Vehicle owners are no longer restricted to fixed rates determined by factors such as age, driving records, and location. Instead, we’re seeing the rise of personalized insurance premiums that use real-time vehicle data to better capture a vehicle owner’s actual driving habits. 

A 2023 study found that one-third of US respondents saw higher auto insurance rates in 2023. This uptick is a big driver of usage-based insurance (UBI) adoption, with policyholders aiming to use data-driven insurance for more accurate risk assessments. In fact, the study found that new insurance customers have a UBI participation rate of 26%. 

But despite these findings, there remains a perception gap in how the general public perceives the relationships between car data and car insurance. Instead of a technology aimed at lowering insurance rates and improving the user experience, the mishandling of vehicle data has caused data-driven insurance to be branded as a security risk. 

Is this really the case? 

Let’s dive in. 

The controversy around data-driven auto insurance 

Earlier this year, a story broke about vehicle owners experiencing spikes in their car insurance costs due to inaccurate risk assessments made with their vehicle data. This data included the start and end times of trips, distance driven, speed, hard braking, and sharp accelerations. But the bigger issue lies in the fact that this vehicle data was sold to a data broker, LexisNexis, without clear customer consent. These vehicle owners were unaware that their data was being tracked for insurance purposes. 

One vehicle owner told the New York Times that this matter “felt like a betrayal.” In this case, drivers felt vehicle connectivity had been used against them, leading to higher premiums based on data taken out of context. 

Does this mean that all telematics-based insurance is bad? Many consumers disagree. In a survey we conducted of 1,000 drivers across North America and Europe, we learned that 42% rate auto insurance as their most valuable use case for vehicle connectivity. 

So, what went wrong in the LexisNexis story? 

There was no awareness that vehicle data was being shared in the first place, let alone what that data could do. As a result of that, customers were not given the opportunity to take accountability for their driving behavior and make necessary changes.

Customer consent is non-negotiable when using car data for insurance 

Access to vehicle data doesn’t mean high insurance costs. In fact, vehicle telematics powers mileage-based insurance products that help drivers obtain insurance rates that are proportionate to how often they drive. But the success of this technology doesn’t solely depend on access to vehicle data. It also requires commitment from vehicle owners themselves to engage in safer driving habits and work toward the incentives provided by a data-driven insurance program. 

To get commitment from vehicle owners, you need consent — and consent was the missing piece in this year’s auto insurance controversy. 

Clear communication is crucial for building trust and ensuring that drivers feel in control of their personal data. An auto insurance solution that uses vehicle data must operate with a robust consent management system that ensures policyholders know exactly what data they are sharing, why they are sharing it, and what benefits they will receive in return.

Why consumers adopt telematics-based insurance in the first place? 

Auto insurance technology is evolving alongside the changes we’re seeing in modern vehicles. But this new wave of insurance solutions and products aren’t just nice-to-have add-ons with minimal impact. They’re driven by real customer concerns that insurers have not been able to address at scale without vehicle data. 

For example, increasing auto insurance costs have motivated more consumers to enroll in usage-based insurance. A 2023 study by J.D. Power discovered that participation in usage-based insurance programs has more than doubled since 2016 to 17% of auto insurance customers in the US. These participants also recorded a price satisfaction score that’s 59 points higher on average than non-participants. 

Vehicle connectivity has also encouraged automakers to explore embedded insurance options. In addition to that, 79% of customers would be open to purchasing insurance that’s bundled with their vehicle. This interest from customers have been largely driven by tedious, fragmented processes in auto insurance and warranties. 

Connected car data gives insurers the opportunity to digitize their processes and help customers save time with reliable mobile applications, data-driven automation and predictive technologies. Vehicle owners can experience benefits like: 

• Faster claim validation: Telematics data can be used to verify claims quickly by retrieving real-time information from the policyholder’s vehicle.
• Predictive maintenance: Insurance apps can alert drivers when it’s time to check their tires, engine, or braking system, reducing the likelihood of claims and accidents.
• Incident notifications: Automatic alerts can notify the insurance provider immediately if the policyholder’s vehicle is involved in an accident.
• Roadside assistance: By accessing the vehicle’s location and diagnostic data, insurers can dispatch help faster and with the right equipment.
• On-demand vehicle information: Providing policyholders with access to vehicle diagnostic data can give them a reason to engage regularly with their insurance apps.

What car data do auto insurers collect for their connected products? 

Auto insurers might collect the following data points directly from a vehicle’s telematics system for more accurate risk assessments and personalized premiums:

• Mileage: Helps determine how often a driver is on the road. Drivers who use their car less frequently may be offered lower premiums.
• Location: Tracks where a car travels. Insurers may charge more if a driver frequently navigates high-risk areas or accident-prone zones.
• Speed: Provides insights into how fast a driver travels. Higher speeds can increase risk, which could result in higher premiums.
• Hard braking/acceleration: Measures aggressive driving behaviors that can indicate riskier driving habits. Drivers with smoother driving records may benefit from lower rates.
• Time of day driving: Reflects when a driver is on the road. Driving during rush hours or late at night may increase premiums due to the higher likelihood of accidents.

But insurers don’t need access to all of this data altogether to create value for end users. By accessing a vehicle’s mileage data, insurers can already reap the benefits of reduced losses from underreported mileage, misrepresented garaging, and incorrect VINs. Many popular protection services like usage-based insurance and mileage-based warranties operate using with vehicle mileage and location data. 

How do auto insurers collect this data? 

Traditionaly, auto insurance businesses would resort to these two methods for collecting telematics data: 

• OBD-II dongle: This device plugs into the car’s diagnostic port to record data directly from the vehicle. Purchasing and delivering these devices at scale have higher administration costs. It’s also not the best user experience, as customers must install it themselves and ensure the device is properly connected. Some newer vehicles also don’t have an OBD port, so customers would have to purchase an extra adaptive device. 
• Smartphone telematics: Drivers install an app on their phones to collect data via GPS and accelerometers to provide insights into driving habits. This form of data collection is less reliable and can’t be used to differentiate between different drivers of the same vehicle. 

Here’s a third option that’s becoming more common in the auto insurance space because it can’t be tampered with, has no learning curve, and has more data transparency: Using an API. 

A car API allows insurers to access standardized vehicle data directly from the car without any hardware or application installation. With an API, platforms like Smartcar can extend the value of vehicle integrations by incorporating essential features like consent management into the mix.  

Today, APIs are used to enable different kinds of insurance use cases beyond vehicle protection. For example, commercial auto insurance providers use APIs to retrieve employee information from HR or payroll systems to process employee policies and coverage needs faster. 

Does secure, data-driven insurance exist? 

Yes, it does. But auto insurers and automakers must prioritize working with the right partners to enable and protect data sharing. 

In our 2023 State of Connected Car Apps report, we discovered that 45% of respondents wanted a written breakdown of how an app will use the vehicle data collected from them. Smartcar’s Director of Partnerships, Dan Teeter, explains in a webinar discussing these findings that the terms and conditions presented to drivers about data-sharing are not clear enough to be understood.  Policies are often buried in long terms of service, leading consumers to feel blindsided by hidden costs or changes to their premiums.

When you’re able to communicate [these terms and conditions] in a very visual, very simple way where a customer gets to opt in and say, ‘Yes, I agree to share certain information about my vehicle with Recurrent so they can make my EV ownership better,’ — and that's one thing versus having 30 pages worth of legalese that's only really meant for lawyers to deal with.

— Dan Teeter, Director of Partnerships at Smartcar

Smartcar is a neutral consent management platform that provides secure and standardized access to vehicle data while ensuring transparency and consent management. Consumers can revoke access if they don’t see value, ensuring they stay in control of their personal information. 

For data-driven insurance to thrive and win the trust of drivers, we believe that automakers, insurers, and platforms like ours must work together to ensure transparency, consent, and a clear value proposition for vehicle owners.