Black Box Insurance: What it Means, How it Works

What Is Black Box Car Insurance?

Black box car insurance, also known as telematics insurance, is a type of auto insurance that uses technology to track and record a policyholder's driving behavior. The goal is to base the driver's insurance premiums on how much they drive and how safe (or risky) they are behind the wheel.

Key Takeaways

  • Black box car insurance uses technology to track and record a policyholder's driving behavior.
  • The insurance company can then tailor premiums based on how much and how safely the policyholder drives.
  • Safe drivers may see a reduction in their auto insurance premiums, but others may end up paying more than they would with a conventional policy.

How Black Box Technology Works

Telematics relies on a combination of telecommunications technology, including wireless devices such as cellphones and GPS.  

A "black box" is either physically installed in the car or downloaded as a smartphone app. It links to a GPS device that measures and records vehicle speed, location, distance traveled, driving frequency, and time of day the car is in motion. Other driving performance factors that can be measured include how hard the driver applies the brakes, how rapidly the car accelerates, and how sharply the driver may take a corner. 

All that data is converted into a score, which the insurance company can use to set a personalized premium rate for the driver. The better the score, the lower the premium should be.

How Insurers Use Black Box Technology

Auto insurers use black box technology for a number of purposes.

For example, some insurers offer pay-as-you-drive (PAYD) or usage-based insurance (UBI) policies. With a conventional auto insurance policy, drivers typically pay a fixed premium determined in part by the number of miles they expect to drive during a certain period, such as six months. By contrast, with a PAYD policy, the driver only pays for the miles they actually drive. The black box device or app is how the insurer keeps track of this.

Other insurers use the technology primarily to assess how much risk a particular driver poses. They may offer refunds to safe drivers, provide a bonus mileage allowance for them, or renew the policyholder’s policy at a lower rate.

Those incentives appear to be leading to a growing acceptance of black box technology on the part of drivers. A 2021 J.D. Power survey found that only 16% of U.S. car insurance customers have signed up for telematics, and 34% are willing to try one, particularly since some of the insurers offer 30% to 40% discounts for customers that do.

Similarly, in 2020, a survey by Arity, a telematics company, found that "about 50% of drivers were comfortable with having their insurance priced based on the number of miles they drive, where they drive, and what time of day they drive, as well as distracted driving and speeding." That figure was up more than 12 percentage points from a similar survey in 2019.

But though the technology can mean lower rates for some policyholders, a driver who has a long commute, works late-night shifts, or consistently goes over the speed limit may end up paying higher premiums with a black box policy than with a traditional policy.

Another cause for concern is data privacy—in particular that insurers will share personally identifiable information gathered from black box devices with third parties such as banks or law enforcement agencies. In the Nationwide survey, 62% of drivers said they had privacy concerns.

Article Sources
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  1. Consumer Reports. "What You're Giving Up When You Let Your Car Insurer Track You in Exchange for Discounts."

  2. Arity. "This Just in: Consumers Are Now Much More Comfortable With Sharing Driving Data."

  3. Nationwide. "Consumers Interest in Telematics Reaches New Heights."