The biggest UBI regulation of the decade may arrive in California

In the UBI North America Study, we were recommending governments to avoid over-regulating auto insurance and were giving California as an example of this pattern of overreach.

However, after more than 35 years of prohibiting insurers from pricing behaviour-based insurance with telematics, California may finally be about to change course. Assembly Bill 311 (AB 311), currently under consideration by the California Legislature, would allow carriers to offer voluntary behaviour-based, telematics-enabled programmes.

The Consumer Driving Data Protection Act would represent one of the most significant regulatory developments in the global Usage-Based Insurance (UBI) market in recent years. Before we go further, let’s remind ourselves what the current legislation is.

The Californian anomaly

In a state that has set the direction for so many technology advances, the auto insurance regulation has been an oddity. While insurers in every other US state have introduced programmes based on smartphone apps, connected vehicles or telematics devices, the “Golden State” has remained largely closed to behavioural pricing as a result of Proposition 103.

This regulation, defined in 1988 – before the Internet was common – mandates insurers to base premiums primarily on:

• The driver’s safety record (which was never explicitly defined but led Motor Vehicle Records to be used as the default),
• Annual mileage,
• Years of driving experience.

This means that insurers have been able to collect limited mileage information and thus launch Pay-as-you-Drive (PAYD) programmes in the State. This has been the case of Metromile (now part of Lemonade) for example.

However, they have been unable to use detailed driving behaviour, e.g. harsh braking or distracted driving, to calculate premiums. This explains why neither Progressive nor Tesla have deployed their PHYD (Pay-How-You-Drive) programmes in the state, sticking with claims-based, backward-looking premiums.

As a result, the largest auto insurance market in the US has remained largely inaccessible to modern telematics solutions, despite its constant progress.

This has had negative consequences.

While regulations are necessary, it is easy to over-regulate. Excessive and outdated restrictions such as Proposition 103, which last for decades, are significantly limiting innovation in the supply and even the volume of the supply, thus penalising those drivers that the law is aiming to protect.

Yes, average Californian auto premiums have remained relatively reasonable compared to other very urbanised states. But, of all the highly urbanised states in the US, California (with a 94% urban population) has the highest rate of uninsured drivers: 17%, vs 13.8% in Texas or 8.8% in Massachusetts! This catastrophic market failure denotes a clear restriction of the supply.

The cause is obvious: in 2023, for every $100 of private passenger auto insurance premium, carriers were losing $15.8!

In addition, the unability to better segment the market through actual, risk-predictive factors has been a key issue. Why should a prudent driver be charged the same as a very aggressive driver that has not had an accident… yet?

What AB 311 would change

First, the act recognizes the situation:

Because Proposition 103 (…) leaves California as a national outlier in options for automobile insurance consumers, it is the intent of the Legislature to modernize California’s outdated, and anachronistic, automobile insurance system, with the purpose of promoting better driving, lowering emissions, and reducing social concern about insurance rates being linked to traffic stops.

Thus the “purpose (…) is to provide statutory guidance for the voluntary collection, use, analysis, retention, and disclosure of telematics data in private passenger automobile insurance rating, while ensuring actuarial integrity, promoting fairness, preserving regulatory oversight, and safeguarding strong fundamental consumer privacy rights, consistent with these concerns and principles and in furtherance of the purposes of Proposition 103″.

As it appears, the proposed legislation would definitely not mandate telematics. It would allow drivers to voluntarily enrol in Department of Insurance-approved telematics programmes.

The act does not specify the data collection technology used so smartphone apps, connected vehicles, OBD dongles or any other aftermarket telematics data may be used.

Carriers would also remain subject to the DoI’s prior approval process for insurance rates.

In other words, California would allow telematics but still regulate it.

Privacy takes centre stage

Perhaps the most remarkable aspect of the bill is its emphasis on privacy, which is not surprising given that California was the first to regulate personal data protection in the CCPA.

AB 311 contains one of the most detailed privacy frameworks for insurance telematics seen anywhere in the world.

Among other requirements, insurers would have to:

• Obtain explicit customer consent before collecting driving data,
• Clearly explain how the data will be used,
• Limit its use to underwriting and pricing personal auto insurance,
• Prohibit the recording of in-cabin audio or video of vehicle occupants but also persons outside of the vehicle,
• Delete collected data after a 6-month retention period, except where legally required otherwise,
• Prevent telematics information from being reused for unrelated commercial purposes.

Again, the good intentions of Tina McKinnor, the Democrat lawmaker who presented the bill, may go too far… For example, it will be mandatory to obtain the driver’s specific consent to have the crash details used for claims detection and handling.

But this may be what is required to win 2/3 of the Californian assembly votes! Overall, the bill considerably revamps the personal auto insurance framework, while setting guardrails to avoid unmonintored uses of personal data, as happened in the GM case.

A major opportunity for the insurance industry

For the most advanced telematics insurers, California represents an enormous untapped opportunity. The state has 27 million registered vehicles and is one of the largest personal auto insurance markets globally, with private passenger auto premiums of almost $50 billion!

Many American insurers —including Progressive, State Farm, Allstate and Nationwide— already operate sophisticated telematics programmes across almost every other US state. If AB 311 becomes law, these carriers could extend those capabilities to California for the first time.

The legislation could also stimulate greater competition by allowing insurers to differentiate themselves through behavioural pricing rather than relying primarily on traditional rating factors. It might also be a case of improving telematics programs to measure behaviours such as tailgating, which is today still absent from most carriers’ rating, despite its proven contribution to crash frequency. After all, Progressive launched its Snapshot program more than 15 years ago and the rating factors have changed very little.

California has often set regulatory trends that later spread across other jurisdictions. In this case, it would be the last to join the fray but maybe would add the privacy framework that is often missing in the US.

Not without controversy

As might be expected, opposition to the bill remains significant.

Interestingly, the state’s Insurance Commission is against it:

In California, auto insurance has to be rated in a driver’s actual driving history, not the product of an unverified algorithm or artificial intelligence system predicting future driving.

Certain consumer advocacy groups and privacy organisations also argue that even voluntary telematics programmes may become difficult for consumers to refuse if premium discounts become sufficiently attractive.

Others question whether telematics scoring models are sufficiently transparent and whether certain categories of drivers —such as night workers or urban motorists— could be disadvantaged.

These concerns are likely to remain central as the legislation continues through the legislative process.

In our view, some of these comments tend to overlook the fact that UBI has had a proven effect on reducing risks. If one disagree with US-based market evidence, it is also possible to see the same impact of telematics on risks in countries such as Italy and the UK.

However, the key element is that, even with AB 311, UBI will remain optional. But at least those who want to benefit from safe driving discounts will be allowed to choose UBI policies.

A turning point for the UBI market

The proposed legislation attempts to strike a new balance between 2 objectives that have often been viewed as conflicting: encouraging fairer, behaviour-based insurance pricing while giving consumers stronger control over their personal data. In any case, one thing is already clear: California is no longer debating whether insurance telematics should exist. It is debating how insurance telematics should be governed.

If adopted, AB 311 would remove one of the last major barriers to nationwide telematics insurance in the United States. Its importance is likely to go beyond California itself. First by pushing other states to specifically define the framework of insurance telematics; Second by pushing certain other regions or countries to adopt rules on telematics.

In the UBI North America Study, we were predicting the UBI market to grow to $200 billion by 2035.

By opening a new, $50 billion, market to UBI, a Californian regulatory change could make our forecast look conservative! Particularly if the Canadian provinces that have also restricted telematics, e.g. British Columbia and Saskatchewan, join the movement.