Until now, U.S. insurers haveintentionally restricted the impactof their telematics programs by holding riskier drivers harmless.Insurers told policyholders entering into their telematics programsthat their premium could only go down or remain the same—even ifthe telematics device revealed driving behavior that actuallywarranted a higher premium.

But now the practice has changed.

In its 2014 annual report, Progressive dropped a bombshell thatit is “affording more customers discounts for their good drivingbehavior while for the first time, increasing rates for a smallnumber of drivers whose driving behavior justifies such rates”(author's emphasis). A Progressive representative estimated thatabout one-fifth of its pay-as-you-drive Snapshot customers may seerate increases.

Progressive's Snapshot program is available in 45 states. In2014 it wrote an impressive $2.6 billion of premiums for Snapshotcustomers, and the program is growing considerably faster than theinsurer's entire Auto book of business.

Progressive's decision to raise premiums for policyholders whomSnapshot reveals to be poor drivers is no more than actuarialcommon sense. The insurer is saying that whenever its telematicsdata indicates a higher premium for a given policyholder, it willcharge that higher premium. That policyholder can find a lowerpremium and move to another insurer, but that carrier willexperience higher losses for a lower premium. In insurance, this isknown as the other insurer experiencing adverse selection.

In a way, this new development in the Snapshot program is nomore than an extension of Progressive's well-known Comparison Rateprogram, which gives a potential policyholder an indication of howmuch a Progressive policy will cost versus a policy from otherleading insurers. Progressive is offering Comparison Rates forabout 15 lines—ranging from Auto and Home to Life, Health andpet.

At its most basic level, being a successful insurance company issimple. Understand the risks that are submitted to yourunderwriters, and charge the right premium for those risks.Progressive is not a stupid company. With this announcement,Progressive is signaling that its Snapshot telematics program letsit charge a more accurate and higher premium to certain riskydrivers—and it jolly well will do it.

There are some big questions still to be answered. Evencompanies that are not stupid occasionally make mistakes. It ispossible that Progressive is underestimating the amount of businessit will lose when certain Snapshot policyholders leave after seeingtheir premiums increase. Progressive also may not raise riskydrivers' premiums by a sufficient amount for the actual lossesincurred.

Other Auto insurers will have to do their own analyses, usingeither internal telematics or external aggregated data. If theirdata leads to the same conclusion, they will have to followProgressive's lead. The iron law of the competitive market applies:Eat or be eaten.