To the average consumer, car insurance can seem pretty arbitrary. What you get charged often depends more on where you drive than how you drive.
John Egan of InsuranceQuotes.com says it's very often about location, location, location. Two people, he says, can live in two different zip codes in the same city "and pay a substantially different amount of money, depending on exactly where [they] live in your community."
How much a driver pays also varies widely from state to state. State laws about personal injury and liability go into the mix, along with a whole host of other factors.
Massachusetts drivers pay the lowest premiums, Egan says, while Michigan drivers pay the most.
"In the Detroit area in particular, there are a lot of uninsured drivers," Egan says. "And when you've got more uninsured drivers, that tends to drive up the cost for everybody who does have car insurance."
A Whole New Pricing Model
But while those pricing swings from zip code to zip code are well-entrenched, there's also a big change under way in the car insurance business, as advances in technology transform how the industry functions.
"There's always been a lot of competition for auto insurance," says Bob Passmore, a senior director with the Property Casualty Insurers Association of America and a 30-year industry veteran. "But I think the way that insurers do business, and the way that they advertise their business, has changed."
One result — car advertising has proliferated on television.
But there are other shifts under way, as well. The recent recession, says Passmore, means there are fewer new cars to insure.
At the same time, the Internet is making it easier for consumers to find the lowest price — just as insurers are streamlining their practices with new high-tech tools.
"For the first time ever, we can now go in as an industry and observe individual driving behavior," says Richard Hutchinson, a general manager with Progressive Insurance.
"Historically, the industry has priced based on modeling, which is more arbitrary than an individualized quote based on one's actual activity," Hutchinson says.
But today, Progressive can put a device in your car that determines how well you drive — tracking if a driver frequently slams on the breaks, for example.
With that data, the company can then determine how much that driver should pay for insurance. Other companies are now following suit.
Better Rates, But At A Price
These kinds of advances are the cutting edge of the business, and companies are even moving from devices that track not just how you drive, but also tell you when you're doing something reckless or dangerous.
Dave Ferrick of Agero, a company that makes these types of in-car devices, says all technologies have trade-offs.
"The analogy I give is when we were all kids," Ferrick says. "If your mother said to you, 'You're going to go out right now [and] I'm going to put this thing in your hand, which [means] at any second I can call you, and you have to pick up the phone,' I would say, 'I don't want it.' "
Just like the cellphone took away some freedoms, Ferrick says, drivers will lose some freedom as technology advances.
"I can save you some pretty serious dollars on your premium," he says. "Are you willing to sacrifice, knowing that somebody is not watching where you drive, necessarily, but how that car is being driven?"
Thus far, only a small fraction of drivers have installed the tracking devices in their cars. For its part, the industry says tracking is the way of the future — and giving up freedom is the only way to save money.