INSURANCE BY THE MINUTE

One of the nation's biggest auto insurers is using satellites to track its customers at the wheel. Is this the future of auto insurance?

IF DRIVERS PAID FOR gasoline the way they pay for auto insurance, they would pay a flat fee to a gas station every few months. After that they could pump all the gas they wanted. Sound silly? Of course. Under such a system, low-mileage drivers would subsidize high-mileage drivers. Everyone would spend more time on the road since the added cost of doing so would be zero.

All-you-can-pump gas isn't about to catch on. But all-you-can-drive auto insurance is here. It's the norm. An experiment by Ohio-based Progressive Corp., however, could eventually change that.

Progressive has fitted the cars of some of its Texas drivers with videocassette-size Global Positioning Satellite (GPS) devices. The devices, which sit behind the dashboard, track the number of minutes customers drive, as well as where they drive and when. The insurer then uses this information to set each customer's premium. If this doesn't prove too costly-and if regulators don't block it-it could reshape the auto insurance industry.

For Progressive, the nation's fourth-largest auto insurer, with revenue of $6 billion, the benefits are clear. If it can assess the risks of different drivers more precisely than the next insurer, it will be in a position to price coverage in a way to attract low-risk customers and chase away high-risk ones. The Progressive rating system doesn't displace traditional criteria (like age, address, vehicle model and accident history) but rather supplements them. You pay more in the Progressive GPS plan for driving a lot, driving at night or driving in cities.

While other insurers typically ask their drivers about mileage, the answers don't have much effect on premiums, says James Barrett of the Economic Policy Institute in Washington, D.C. "They assume that you lie, because it is in your interest to do so," he says. "And so they give very little weight to those insurance forms that you fill out."

Progressive's experiment avoids this problem. And it's not just the insurer, which can charge drivers more accurately, that sees benefits. So, too, do drivers and possibly society at large.

According to Progressive, customers in Houston, where tests of the program began in 1998, have saved an average of 25%, with some saving 50% or more. Just how much of that savings is due to people altering their driving habits is .unclear. But transportation experts say that making premiums fully variable-Progressive makes them mostly variable-would lower the number of miles people drive by 10% or more.

Liberals are going to be twisted into knots trying to decide whether to oppose this kind of insurance. On one hand Progressive is discriminating among customers far more than most insurers do, and discrimination sounds bad. On the other hand the reduction in miles driven would make the air cleaner. The U.S. Environmental Protection Agency has signed an agreement with Progressive to monitor the program's environmental benefits.

A big drop in miles driven would, of course, also lower the number of traffic jams and accidents. Progressive's program could also help women-who drive about 40% less than men-and the poor, who drive only about half as much as the better-off. Then there are the losers: people who drive a great many miles or who drive late at night or in areas that are heavily congested. If Progressive's program grows in popularity, such drivers could end up paying more even if they don't sign up for GPS monitoring. Why? Because simply by declining to sign up, they reveal they ought to be paying more.

You can imagine the squawks that will come from people who believe that prices ought to be set by government decree rather than by the free market. Listen to former Texas insurance commissioner Robert Hunter, now insurance director at the Consumer Federation of America. "For example, the swing-shift guy who may be a laborer or the lady who cleans the offices who's probably driving home at 2:00 A.M. Are you going to start charging her for that? That doesn't seem fair," he says.

Hunter also raises another big worry: privacy. "With GPS you can tell where people are stopping and going," Hunter says. "So if I stop on a corner and do that every night on the way home from work, am I going into the bar or across the street to the health club? Will they use that kind of information?"

Progressive promises that it won't. Todd Litman of the Victoria Transport Policy Institute says that any privacy concern can be solved. "You could have it structured so that the data are not retained one day to the next," he says. "So the only thing the computer does is track your bill. It's impossible for somebody to come back later and demand the information."

What about Progressive's competitors? Will they want the regulators to outlaw GPS pricing? Not necessarily. If the plan tends to keep Progressive's customers off the road, it will leave fewer targets for other cars to collide with. "Progressive is going to reduce the accident costs for all the other insurance companies in Texas by a lot," says Aaron Edlin, an economist and law professor at the University of California at Berkeley.

Competitors probably won't copycat Progressive right away. Not even Progressive has the data in hand that will enable it to accurately price a minute of driving by a given customer. Should the company get the pricing wrong, say, by charging good drivers too much, it will create opportunities for the competition.

Another issue is the cost of the GPS technology. Buying and then installing GPS devices in cars once they're on the road costs several hundred dollars. But costs should drop over the next couple of years as GPS devices grow more popular and as automakers begin installing them at the factory. Despite the obstacles, Progressive seems dead serious about making this system work. "Innovating is really part of our culture," says Glenn Renwick, Progressive's boss of insurance operations. While the company isn't enrolling new per-minute drivers right now in Texas, it has talked to regulators in other states, including Ohio, Illinois and California. It has also obtained two patents.

Is Progressive's high-tech pricing the future of auto insurance? Could be. "Automobile-insurance pricing has hardly changed at all in the past 50 years," says transportation expert Litman. "And it's astounding, because there is every reason that it should be priced differently."

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By Ira Carnahan