What Is Black Box Insurance?
Black box insurance, also known as telematics insurance, is an auto insurance program that offers premiums based on current driving behavior as opposed to historical performance. Black box insurance aims to match motorists with personalized premiums according to their driving performance.
Black Box Insurance Explained
Financial sectors like insurance have implemented new technology in their processes to improve delivery and services to policy owners. Insurtech, a combination of insurance and technology, uses tremendous amounts of user data to reduce dangerous driving, reward good driving behavior, and boost customer satisfaction. Insurance companies use telematics technology to create the black box by fusing data from telecommunications and informatics applied in wireless devices like cellphones and GPS.
How a Black Box Works
The box is either physically installed in the car or installed as a smartphone app. It links to a box GPS that measures and records vehicle speed, location, distance traveled, driving frequency, and time of day the car is in motion. Other driving performance factors also measured include how hard the brakes are applied, how rapid the acceleration level is, and how sharp of a corner is taken.
The comprehensive data gathered on these activities provides information on how safe the driver is. This information converts to a score, which the car insurer uses to create a personalized premium for the driver. An insurer will reward a driver who secures a high score with a lower premium rate.
How Insurers Use Black Box Technology
Some insurers implement black box procedures to create a pay-as-you-drive insurance (PAYD) policy for car owners. In a standard insurance policy, insurers normally quote drivers a fixed premium given the number of miles allowed per year. With a PAYD policy, the auto driver only pays for what they use in terms of miles driven. PAYD is also known as usage-based insurance (UBI), because the insurer only charges the user for the number of miles driven as recorded by the black box device or app.
Insurers that use black box insurance differ in the ways they use the information from the telematics box or app. Insurers may offer refunds to safe drivers, extend bonus mileage allowance for high scorers, or renew the user’s premium at a lower rate. Insurers use the data received monthly or annually and make periodic adjustments to a driver's risk profile.
A driver who makes frequent, long commutes, one who works late-night shifts, or a driver who consistently goes over the speed limit may end up paying a higher premium using a black box policy than a standard traditional policy.
Data Privacy Issues
Data privacy issues are a legitimate cause of concern among black box skeptics. Invasion of privacy may occur when insurers share personally identifiable information (PII) gathered from black box devices with third parties such as banks or with law enforcement agencies. For this reason, data privacy laws are constantly creating usage laws on how to use, share, and store data.