What is Telematics and how is it reinventing Auto Insurance?

Before explaining telematics, I need to provide some background. Historically, auto insurance rates have been generated at the zip code level. This means that a “base rate” is determined for your zip code based on how people who live in your zip code drive. Zip codes with higher numbers of car accidents will have a higher auto insurance base rate and vice versa. You may have your premium discounted off the base rate for a variety of reasons such as being accident free, having good credit or for taking a defensive driving class. You may also have your premium surcharged above the base rate for reasons such as having a poor driving record, having below average credit, or not having a good payment history. Typically, the base rate in similar zip codes is pretty similar. For example, the base rate in Clifton Park is probably pretty close to the base rate in Guilderland but the base rate in Clifton Park is likely to be significantly lower than the base rate for Queens.

Garaging Zip Code

An important concept for base rates are that they’re based on where you live (referred to as garaging zip code) and not where you drive. If you live in Clifton Park, you’re going to pay the same for auto insurance whether you drive exclusively in Clifton Park or if you take regular road trips to Boston. Around the Capital Region, this probably doesn’t make too much of a difference, but allow me to provide a more extreme example for illustrative purposes.

Most people think driving in Manhattan is more treacherous than driving in the surrounding areas. Yellow cabs are weaving in and out of traffic and every other car has a scuff, scratch or dent visible. A lot of folks drive with white knuckles in Manhattan. Logic might suggest that the base rate would be highest in Manhattan because of this but that’s not the case with many insurance companies. In reality, a good number of those cars, drive over a bridge and head home to a place such as Queens or Brooklyn at night. Many of those drivers actually live in a different borough than Manhattan. People who live in Manhattan often use public transportation in the city and have their cars stowed away safely in parking garages to only take them out when they travel outside of the city. With many insurance companies, the base rate for Queens, Brooklyn and the surrounding areas might be higher than the base rate for Manhattan because, in many cases, the people who are causing the car accidents in Manhattan don’t actually live in Manhattan.

So, what does this have to do with us, since we live in the Capital Region?

Insurance companies are constantly looking for ways to more accurately determine insurance rates. There have been significant advancements in technology over the past decade which are allowing insurance companies to make insurance rates more individualized. The old way of determining what you pay for your auto insurance based on how all of your neighbors drive doesn’t seem fair but it’s the best insurance companies could do. Now, with the advent of telematics, insurance companies have the ability to base your insurance rates on how you actually drive. This is an incredible paradigm shift for the insurance industry. Using your actual driving data to determine your base rate is a huge departure from the traditional way insurance companies have operated.


You may not have recognized it as telematics, but you’ve probably seen insurance companies advertising their telematics programs. Each insurance company has a different name for it but the general concept behind all of them is similar. The first iteration of telematics involved plugging a device (pictured above) into the OBD-II port in your vehicle. This is the diagnostic port located under the steering column where mechanics can plug in and read the vehicle’s onboard computer’s fault codes. The telematics device would record certain characteristics of your driving such as the number of miles driven, speed, braking patterns, acceleration, etc. and use cellular networks to report this information back to your insurance company. The insurance company would then score your driving data and give you a discount off the base rate of your auto insurance based on your driving performance.

The telematics device concept has been plagued with a variety of logistical challenges and has proven to be inefficient in the long run. The devices are expensive to produce and distribute. Also, they’re often left behind when people trade in their cars and more recently, the global chip shortage has caused even more of an issue for insurance companies.

Since the telematics device was a good starting point but isn’t a viable long-term solution, insurance companies have shifted to using cellphone apps. Most people have an iPhone or Android device with them at all times. Those cellphones, or mini-computers I should say, already collect an incredible amount of data that you probably don’t realize. Your cellphone provider and the apps on your phone most likely know a lot more about you than you can imagine. Insurance companies aren’t looking for that level of creepiness but they are looking for driving data. The GPS in your phone can easily collect data such as movement (speed), acceleration, deceleration (braking), plus a ton more. Even things like seeing if you text and drive are possible. Plus, from a logistical perspective, using the customer’s cellphone is much more cost effective and efficient than sending a separate device for the customer to install.

Future Telematics

Telematics can even enable insurance companies to allow you to pay by the mile for your insurance. Just imagine knowing that based on your driving characteristics, your insurance company has told you that they’re going to charge you 6 cents a mile. Wow! Now you really have control over your insurance cost. If you drive 12,000 miles a year, you’d pay $720/year ($60/month). Now you’re not paying based on how your neighbors drive anymore. It’s based entirely on you. We’re not quite there yet but that is the direction that the auto insurance industry is moving and it’s moving quickly.

There are countless other possibilities that telematics can enable for insurance companies. Today, insurance companies collect billions of miles of driving data each year which is enabling them to be more sophisticated with their modeling and more precise with their pricing.

The future of insurance is exciting! Please contact me to have a conversation about how telematics can help reduce the cost of your auto insurance. Schedule a phone, zoom, or in person appointment with me at calendly.com/lofrumento/proposal, call my office at 518-877-7447 or visit our contact us page.

John Lofrumento auto insurance Clifton park, nyJohn Lofrumento, CFP®, FSCP®, RICP®
President, The Lofrumento Agency
Clifton Park, NY / Ballston Lake, NY