About a decade ago, with the advent of GPS and better tracking technologies, several insurance companies began offering an alternative option for pricing drivers’ insurance rates. Rather than relying on collective statistics and predictions, the new usage-based car insurance (UBI) gathered information directly from the driver paying the premium. Flipping the old model on its head, UBI gave drivers the opportunity to demonstrate their safe driving skills, and to pay a lower premium in return.
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If you guessed that UBI has only grown more popular over the years, you’re correct. The technology for tracking driver behavior is only improving and insurers and consumers alike have responded well to more personalized premiums. If UBI isn’t an acronym you’re familiar with, familiarizing yourself with this form of insurance could result in more affordable auto insurance.
What Is Usage-Based Auto Insurance?
Usage-based insurance refers to a group of insurance options that take into consideration how, when and/or where you drive and price your auto insurance based on the results. While some insurance companies offer UBI based on how much you drive, your other trackable driving habits often influence how much you’ll pay.
Car insurance companies that support UBI use telematics to discern individual driving behavior. Telematics is the combination of GPS and communication technology that allows information about a vehicle (and therefore its driver) to be transmitted to the insurer. Typically, this is achieved by placing tracking devices in a vehicle or using a provider's mobile app.
Vehicle telematics have improved greatly over the last several years, enabling auto insurers to more closely track specific driving behaviors that are indicative of how much risk each individual poses to insure. Some of the behaviors that commonly tracked for UBI purposes include:
- How many miles you drive
- What time of day you drive
- Where you drive
- How quickly you accelerate
- How often you speed
- How harshly you brake
- How you turn corners
Usage-based insurance goes by a variety of names, depending on the terms used by the insurance company and the type of usage that is used to calculate the premium. UBI is commonly called:
- PAYD (Pay As You Drive)
- PHYD (Pay How You Drive)
- Mile-Based Auto Insurance or Pay-Per-Mile (PPM)
Usage-Based Insurance Could Save You Money
Both UBI and traditional insurance reward safe drivers, but drivers benefit from the two types of insurance in different ways. While traditional insurance rewards drivers with lower premiums after safe habits have been established over a long period of time, UBI offers safe drivers more immediate gratification for their non-reckless ways.
In addition to rewarding drivers that already have safe driving habits, UBI offers an incentive for drivers to continuously drive safe for increased savings.
UBI has obvious benefits for both insurance companies and consumers. Insurance companies are able to price auto premiums more accurately when they have personalized driving data about an individual. Individuals receive auto insurance rates that are more closely tied to their actual driving habits than to the existing statistics about their demographics.
The tracking technology that accompanies UBI has also helped reduce auto insurance fraud and response time after a vehicle is stolen.
Consider Privacy Problems Before Committing
The downside to highly advanced tracking technology is that—yes—it tracks you.
Many drivers are downright skeptical of having their every move tracked by their car insurance company, despite the benefits that tempt customers with good driving habits. In an age of big data, allowing a company to take and store specific data about where you go in your car is, for many drivers, a little too big brother to justify a discount.
If you’re ready to take on the challenge, and the privacy concerns, of paying your premium based directly on how you drive, UBI might be for you. If you’re still wary, or self-aware of your poor driving habits, perhaps it’s best to stick with the traditional insurance route. At least until self-driving cars are here.
And if you are curious about your driving skills, but don’t want your insurance company to see them, try out the safe-driving app EverDrive. The app measures your driving skills (speeding, acceleration, braking, cornering and phone use) for a trip score that you can improve upon.
What Will the Future Bring for UBI?
While some may still be skeptics of UBI, the insurance is only likely to grow in popularity during the next few years. One study found that 70% of all auto insurance carriers are expected to use UBI and telematics by 2020. Additionally, other research found that the majority of drivers would be interested if UBI helped to determine fault in accidents (70%), initiated the claims process (68%) and monitored or coached consumers on improving their driving behavior (62%).
The appeal of having some control over your premium rates is certainly encouraging some drivers to hop on the bandwagon. Furthermore, UBI may even change the insurer and customer relationship. Usage-based insurance is interactive and more about the customer experience. Instead of only speaking to an insurer when you renew or need to file a claim, you can have ongoing, more personalized interactions and UBI may even save you money if you’re a safe driver.
There’s also the future of the insurance industry to think about, considering the eventual influx of self-driving cars—though fully autonomous vehicles are still unlikely to be commonplace for decades.
The auto insurance industry will likely have to innovate, and UBI is the first step in that direction for an otherwise relatively static industry. There will likely be more advanced telematics opportunities in the auto insurance industry in the years to come. Drivers may decide to take usage-based insurance into their own hands with independent apps or risk marketplaces and then decide when to share the information with their insurers. Insurance companies may begin to partner with other telematics companies or marketplaces to expand their UBI offerings. These offerings may include more self-measurement methods for increased personalization and fair pricing. Insurers may find more data sources and form new partnerships. Talk to your insurer to find out more about your carrier's usage-based insurance options to see if the program is right for you.