Tech Roundup Episode 14 – Telematics in Cars and the Regulation of Auto Insurance
Ian Adams joined the podcast to break down the policy aspects of a recent Twitter spat between Elon Musk and California Insurance Commissioner Ricardo Lara. What are telematics, and how are they used by the auto insurance industry? What is California’s Proposition 103? What lessons can this episode teach about policy regarding emerging technologies more generally?
Read Ian’s recent piece on the topic here.
Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.
Introduction: Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker.
Jack Derwin: Welcome to the Regulatory Transparency Project’s Tech Roundup podcast, part of RTP’s Fourth Branch Podcast Series. My name is Jack Derwin, and I am an Assistant Director of RTP at The Federalist Society. Today I’m very excited to be joined by Ian Adams to discuss telematics in cars and their implications for the regulation of the auto insurance industry.
Ian is Executive Director of the International Center for Law & Economics, where his policy work focuses on the impacts of new technologies on law and regulation with a particular focus on automation and the future of work, privacy, and insurance.
It’s great to have you with me today, Ian.
Ian Adams: It’s great to be here, Jack. Thanks for having me.
Jack Derwin: Of course. So this topic largely jumped to the forefront due to yet another Elon Musk Twitter spat. Can you explain what happened there and why exactly it was newsworthy?
Ian Adams: Yes, absolutely. And of course, Elon Musk being mean to someone on Twitter is not itself all that notable but is often newsworthy. In this case, it was because he got into a fight with California’s insurance commissioner over a 30-plus-year-old insurance law that is precluding the vehicles that he builds, the Teslas, from being able to offer insurance discounts on the basis of how they’re driven. It’s not unexpected for Musk to be mean to someone but then to say that you’re bad at your job and that you should be voted out of office was in keeping with, I think, this sort of tenor and tone we’ve come to expect from him.
But it lends itself to a large conversation about telematics more generally and how existing laws can stand to thwart the implementation of technologies that can be better for everyone.
Jack Derwin: Interesting. So to step back for a moment, what exactly are telematics devices?
Ian Adams: Well, we hear a lot about the internet of things these days, but telematics devices have been around for decades now. And what they are are little dongles that will go inside of your car and will track the manner in which you’re driving, and insurance companies can take that information and then reward you with rates that reflect whether or not you’re a particularly safe driver. And so in this case, California has a law from years ago that precludes the use of these devices for privacy reasons, is the argument I should say. And so California is not — in California you are not able to offer the consumers the benefit of rates that are informed by driver performance.
Jack Derwin: Gotcha. So is there a path forward now for the use of these devices in California? Or is Proposition 103 here to stay?
Ian Adams: Yeah, that’s the real question. So Proposition 103 was passed in 1988 by California voters. And basically what it did was it ushered in a new era of insurance regulation around automobiles in the state. Rates are now prior approved there. There are all kinds of factors that have to be taken into account in a very prescriptive order when determining rates. But one of the things that it also banned was the use of telematics to inform those rates outside of simple mileage collection, which is to say rates can only be informed by how many miles you drive, not how you drive those miles.
And so Prop 103 is really very challenging to amend because it was passed by California’s initiative process and also contains a provision which states that it may only be amended legislatively in a manner that furthers the initiative’s purpose, which courts have subsequently interpreted in a very restrictive way.
So the question is how could you possibly go about changing Prop 103? Well, you could spend a lot of money on a voter initiative and put the question to them. But that’s going to cost tens of millions of dollars. Or perhaps courts could look at telematics and novel research in this area, which suggests that the use of telematics actually leads to fewer deaths on the road. Which is to say this technology encourages drivers to drive more safely and we now have seen borne out in the data that these drivers are leading to fewer accidents and ultimately fewer fatalities.
So what does this then look like? Well, the legislature passes a law that expressly provides for the use of telematics devices in California. No doubt there would be litigation as the insurance department and potentially other actors prevent the law from going into effect — sue to prevent the law from going into effect. And then maybe a court looks at it and goes, “Well, the compelling public policy objective of saving human life weighed against the 30-plus-year-old preference for privacy in a very, very narrowly defined sense, the safety rationale should win out.”
So that would be the way moving forward, but ultimately, it speaks to a larger issue that permeates the regulation of technologies around the country.
Jack Derwin: So speaking of the bigger picture, what does this saga maybe teach about the development, deployment, and adoption of emerging technologies more generally?
Ian Adams: And that’s just it. I think it teaches that lesson about the need for regulatory updating. We shouldn’t allow a hand that is 30 years old, when it comes to specific technologies, dictate what the future will hold in a manner that prevents us from adapting and embracing new technologies.
Speaks to the value of regulatory flexibility—so the value of sandboxes, where within a particular field there are different ways that new technologies can be tried out and regulations can develop that are responsive to that.
And it also speaks more broadly to the challenges that are presented by regulation that becomes immutable. So furthering the purposes provision in an initiative sounds good. We saw it in Prop 103 and now, more recently, we actually saw it echoed in California’s new voter-approved privacy law, the CPRA. It sounds good but it prevents societal preferences from really being able to change. And that’s a real problem because, as with society, technology presents new options for people to pursue.
And so at the time in 1988 when 51 percent of Californians approved Proposition 103, it was probably not on their mind that every other state in the country would have access to auto insurance discounts on the basis of driver behavior, that they would then be precluded from enjoying. That can’t have been at the front of their mind because it literally was not an option that yet existed. And yet, now we have this 30-plus-year-old law that is doing exactly that. And we don’t have ready means of addressing it.
So these three lessons are transferable to all kinds of other contexts, privacy being just one of them. And I think speaks to the power of incumbency within our legislative and regulatory process, and the need to constantly be revisiting assumptions that are baked into the law that do not contemplate novel technological developments.
Jack Derwin: Are there other emerging technologies out there you feel could also benefit from this regulatory flexibility?
Ian Adams: I think it’s obvious when you look at applications of automation where federal motor vehicle safety standards literally do not contemplate novel technologies. So why do you need to have mirrors on a vehicle of a sufficient level of automation that doesn’t have a steering wheel? Likewise, there are in the drone context regulations that have been promulgated by the Federal Aviation Administration, and some at the state level, that preclude drones from operating at altitudes that are reasonable for the technology because those regulations only contemplate helicopters and airplanes.
The federal code and state codes throughout the nation, to say nothing of corpuses of regulatory guidance, they just simply do not easily encompass or embrace technological developments in a timely manner. And part of what the Regulatory Transparency Project does is bring attention to those specific examples that need to be revisited.
And so Jack, it’s a delight to talk about telematics in particular, but it’s federal, it’s at the state level, it’s everywhere that these problems persist.
Jack Derwin: And we really appreciate you joining us to talk through this issue and sort of breakdown the actual policy issues behind some of the headlines surrounding the controversy.
Ian Adams: It was my pleasure to be with you today.
Jack Derwin: And thanks so much to our audience for tuning into this episode of RTP’s Tech Roundup podcast. You can subscribe on any major podcast platform. And check out our website, regproject.org, or our social media account, @FedSocRTP, to stay up to date.
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This has been a FedSoc audio production.