Usage-based Insurance in the US and its Advantage for Policyholders

Usage-based insurance or UBI, also known as pay as you drive, pay how you drive, and mile-based auto insurance, is a type of vehicle insurance in which the insurance rates are lowered if drivers score well on different parameters based on vehicle telematics. The notion of UBI insurance was presented some years ago but really gained traction during the pandemic. Insurers now recognize that a UBI insurance model may be the best option for both carriers and policyholders.

How Does UBI Work

Vehicle “telematics” data from cellular, GPS or other technology. These programs monitor specific driving habits such as:

*Speed

*Acceleration

*Hard braking

*Hard cornering

*Miles driven

*Time of day

*Phone use while driving

* Driving in the city or on highways (the latter usually has a higher premium)

In general, driving data is acquired in 3 ways — built-in systems in your vehicle (as in the case of Tesla), a device connected to your car’s onboard diagnostics (OBD-II) port or through a smartphone.

Why Usage-based Insurance is favored by customers

Usage-based insurance can result in significant cost savings for both customers and carriers. Premiums are calculated based on risk and usage, therefore there is a reward structure built-in. Low premiums are given to responsible drivers as an incentive to continue driving carefully. Rash drivers must pay large premiums, which may encourage them to drive more cautiously in the future. Of course, this benefits the greater good by making roads safer. Personalized premium calculations can also lead to more accurate projections of users who are most likely to file claims for carriers. This allows for more exact premium determination and enhances overall earnings.

Common Types of UBI Plans

There are a variety of specific sorts of plans that carriers can offer under usage-based insurance. These are, in general

*Distance-based: Users must pay premiums that are directly proportional to the number of miles driven in a given time period.

*Pay according to how you drive: Premiums are calculated based on the driver’s skill. A driver who frequently speeds or breaks will be charged a higher premium.

*You can pay as you go: Pay as you go is based on distance and skill. Drivers who travel fewer miles and drive carefully will pay the lowest premiums.

A good reference about how the pandemic has pushed insurtechs to work with insurance carriers to enable UBI can be found here.

Legacy insurers are adopting these innovations in large part because innovators like Tesla and Ford are stepping into auto insurance and have based their premiums on UBI.

The Challenges

However, users do have a number of concerns even though they do acknowledge the benefits. 37% of US drivers (Ford stats) say they are concerned about cybersecurity and the protection of their data. When all cars are connected in an automated network, the risk of data leakage is always a concern.

The survey also found that 55% of U.S. Drivers sync their smartphones with their cars but most of them are not aware of what amount of their personal information is being made accessible to their car’s entertainment systems.

A real concern that needs to be addressed by insurance carriers is telematics transparency. Regulations on this are definitely in process.