Paying for a service based on usage is not a new business model, as we’ve seen it used with cellular and internet service providers, but is now growing as a popular automotive insurance option available through several insurance providers. Usage-based insurance (UBI), also known as pay-as-you-drive (PAYD), uses key metrics such as accrued mileage and driving behaviors to determine insurance rates for individuals or businesses.
Like any other usage-based service, UBI is not a one-size-fits-all policy and requires detailed analysis to determine if it will result in a worthwhile savings for consumers and remain profitable for insurance providers. Below we've gone into some detail on how UBI works and who it will benefit the most, as well as its projection moving forward.
How Usage-Based Insurance Works
The metrics required to properly implement UBI are now easier to gather thanks to more advanced vehicle technologies. Below are some of the ways in which UBI functions.
Because these readings are required for emission inspections and other activities, insurance providers can get an unbiased odometer reading on the vehicle and track the mileage properly. Vehicles that have more miles driven are typically at higher risk of accident, and therefore would be charged a higher UBI rate.
Odometer readings do not require any advanced technology and aren't nearly as invasive as the next option we'll discuss. However, though this type of insurance policy would be great for those who have excellent driving records and don't drive often, there are many drivers with reputable driving records that may not benefit from UBI given their substantial driving frequency.
This is where slightly more invasive UBI metrics come into play.
Devices can come installed or plugged into a vehicle’s OBDII connection aftermarket for monitoring driving behaviors. Some of the statistics gathered include the locations driven, rapid acceleration, speed variances, hard braking or cornering, time of day and miles driven. With these detailed statistics, insurance analysts are better informed of risky behavior and apply UBI charges accordingly. Some UBI insurance providers give drivers access to these statistics to promote safer driving habits. There are even discussions with major vehicle manufacturers to include telematics capabilities as standard equipment – much like OnStar or similar systems.
Although municiple reports are also not a new practice, the ability for governments and police authorities to almost immediately transmit information to insurance providers has improved dramatically. If you are pulled over, have an accident, or delay in renewing your license or tag registration you can quickly be reported.
Is UBI the Best Option For You?
In some ways UBI can be beneficial for consumers. Those who exhibit good driving habits tracked by telematics can actually receive significantly lower insurance premiums than they may otherwise get, provided they don't drive well above average. On the other hand, drivers who tend to speed, drive aggressively or are caught “stretching the truth” in an accident could face substantially higher insurance premiums.
Businesses may realize similar benefits or penalties with their insurance premiums. Many companies running a fleet for deliveries or sales calls already utilize telematics to enforce good behavior with employees on the road, allowing them to easily implement usage-based insurance using the same technology.
Will the UBI Trend Continue to Grow?
It appears there will be more momentum behind UBI as the cost of technologies decline and the return on investment for insurers begins to increase. In a 2013 study there were over 170 different UBI providers found. Today the adoption of UBI has slowed somewhat because of the cost to implement.
The telematics devices for vehicles – also referred to as dongles – can be expensive to acquire and also to maintain or replace. The monitoring software required for insurance providers to quote accurately is also a substantial investment. If vehicle manufacturers allow embedded telematics, the costs for consumers could be offset to some degree.
In order for insurance companies to give accurate vehicle insurance quotes - whether usage-based or not - a vehicle database with VIN decoding capabilities is a necessity. Some of the more complete vehicle databases can greatly help insurance providers determine which vehicles have built-in telematics as standard or optional equipment and which may need an aftermarket telematics device installed. As telemetics technology becomes more prevalent, we can expect to see an increase in usage based insurance for the future.