A nice article in Zerohedge about the recent rate hike for Tesla owners (link). Of course, Tesla is crying foul.
The gist of the story is that Tesla owners tend to get into more crashes and the repair cost is higher than for other brands. The former is a matter of statistics - but also self-selection: in my limited encounters, the first things Tesla owners tell me about their cars are the fast acceleration and the top speeds. The high cost of repair is widely acknowledged.
Tucked into the second half of this article is a little advertisement for a startup called Root. It explains:
Root is an insurance startup that sets premiums based on individual driving behavior. Customers download the Root app and drive with their smartphone in the car for two weeks. Rates are determined from the habits observed over that period.
This product has some "brilliant" features:
- It prices insurance rates using individual data for two weeks instead of decades of historical data for all kinds of drivers for a long time
- It only sells to drivers with smartphones
- It assumes that drivers who are being measured by their smartphone app for two weeks behave normally
- It assumes that two weeks is sufficient time to measure one' driving behavior
- It assumes there are enough claims during those two weeks
- It assumes that no one will manipulate their data to fool the algorithm
- It assumes that no tech-savvy engineer will sell software that manipulates the data
I say "brilliant" because Root is getting into a very dangerous game. In Numbers Rule Your World (link), I discuss the statistics of the insurance business. Warren Buffet, who is one of the savviest in this business, often warns against insurers who compete on lower rates, because they will superficially win business for a short term until the losses blow over. The riskiest customers are the ones who most need a price break.
What you have here is a pile of data - all biased to indicate lower risk, and thus justifying lower premiums.