Usage-based insurance (UBI) is a type of insurance where the premium is based on the specific behaviors and habits of the insured. It’s becoming more popular as cost-conscious consumers look for ways to pay only for what they need. The UBI market is estimated to grow from $48.38 billion in 2023 to $63.29 billion by the end of 2024. At a compound annual growth rate (CAGR) of 29.0%, it’s expected to grow to $175.27 billion by 2028. Here’s what independent insurance agents should know about usage-based insurance.
A Quick Overview of Usage-Based Insurance
Usage-based insurance (UBI) is most often associated with auto insurance. This approach contrasts with traditional auto insurance, which typically sets premiums based on generalized factors like the driver’s age, gender, location, and driving history.
UBI, on the other hand, relies on telematics technology to monitor driving behavior. This can involve installing a device in the vehicle or using a smartphone app. These devices collect data on various driving metrics such as speed, acceleration, braking, mileage, and even the time of day the vehicle is used.
Some UBI programs offer real-time feedback through apps or online portals, enabling drivers to see how their behavior affects their insurance costs. This information can prompt drivers to make adjustments accordingly, leading to safer driving.
Types of Usage-Based Insurance
There are a few different types of usage-based insurance based on how costs are calculated.
Pay-As-You-Drive (PAYD) Insurance
The PAYD model charges drivers based on the number of miles or kilometers they drive. The less you drive, the less you pay. This benefits people who don’t drive that often or for long distances. PAYD insurance typically uses telematics devices or apps to track mileage — either as an installed device in the vehicle or as a smartphone app.
Premiums in PAYD insurance can be more variable compared to traditional policies, as they’re adjusted based on the amount of driving done within a billing period. By linking costs directly to driving habits, PAYD insurance can incentivize people to drive less, which may lead to reduced traffic congestion and lower emissions.
Pay-How-You-Drive (PHYD) Insurance
The PHYD model considers driving habits in addition to mileage. This model goes beyond just tracking the distance driven (as in Pay-As-You-Drive insurance) and considers a range of driving habits to assess risk more accurately and provide personalized pricing.
PHYD insurance also uses telematics devices or apps to track mileage. The data collected is then transmitted to the insurance company for analysis. Real-time feedback and the incentive to improve driving behavior can lead to safer driving practices and reduced accident rates.
Safe driving behaviors (like smooth acceleration, gentle braking, and following speed limits) can lead to lower premiums. Risky behaviors (like speeding, hard braking, and aggressive cornering) may result in higher premiums.
Manage-How-You-Drive (MHYD) Insurance
The MHYD model is like other UBI models in that it uses telematics devices installed in the vehicle or smartphone apps to track driving behavior. However, MHYD programs provide continuous feedback to drivers. Drivers receive reports and tips to help them understand how their behavior affects their safety and insurance rates. They receive feedback through mobile apps, email, or online dashboards.
These models provide feedback to drivers based on their driving habits. They begin with the driver enrolling in a behavior-based UBI program. Then, the driver agrees to the installation of a telematics device in their vehicle or a tracking app on their smartphone. After implementing one of these, the device or app collects data and transmits it to the insurance company. Insurers may then offer tips to improve driving behavior, which can help drivers qualify for discounts.
Advantages of Usage-Based Insurance
UBI offers clients several advantages, which is why it has become more popular over the years:
- Cost Savings: For many drivers, particularly those who drive infrequently or for short distances, UBI can significantly reduce costs. This is especially appealing in urban areas with good public transportation options where car usage might be lower.
- Encourages Safe Driving: UBI programs often provide real-time feedback and coaching to drivers, encouraging safer driving habits. The feedback and potential savings incentivize safer driving habits, which benefit everyone on the road. They reduce the likelihood of accidents and help insurers lower their claims costs.
- Fair Pricing: Premiums more accurately reflect individual driving behaviors rather than demographic averages. Many consumers prefer the fairness and transparency of UBI. Drivers who exhibit safe driving behaviors can see tangible benefits like reduced premiums. UBI aligns costs more closely with actual risk.
- Environmental Benefits: By incentivizing reduced driving, UBI can contribute to lower vehicle emissions and reduced traffic congestion. This appeals to environmentally conscious consumers and aligns with broader sustainability goals.
UBI has also become more accessible due to the proliferation of telematics technology. GPS, accelerometers, and data analytics have made monitoring driving behavior easier and more cost-effective.
Of course, the fact that UBI is data-driven and dependent on technology means it also has some potential downsides.
Potential Disadvantages of Usage-Based Insurance
While usage-based insurance (UBI) offers many benefits, there are also potential downsides and challenges associated with this model. Here are some of the key concerns to keep in mind:
- Privacy Concerns: The use of telematics involves collecting detailed data on driving habits, including location, speed, braking patterns, and the times they drive. This level of monitoring raises significant privacy issues, as drivers may be uncomfortable with the extent of personal data being recorded and shared with insurance companies.
- Data Security: The sensitive data collected through telematics systems need to be securely stored and transmitted. Any breaches or hacks could lead to compromised personal data, posing risks to drivers’ privacy and security.
- Technical Issues and Accuracy: The reliability and accuracy of telematics devices and smartphone apps can vary. Technical glitches or inaccuracies in data collection might result in unfair assessments of a driver’s behavior, leading to incorrect premium adjustments.
- Compatibility: Not all vehicles may be compatible with telematics devices, and not all drivers may be comfortable using smartphone apps for tracking. This can limit the accessibility of UBI to some segments of the population.
- Potential for Discrimination: While UBI aims to offer fairer pricing based on actual driving behavior, certain driving habits or patterns, influenced by geography or socioeconomic status, could be unfairly penalized. For instance, drivers in urban areas might have higher premiums due to frequent stops and starts, even if they are safe drivers.
While UBI presents a promising approach to more personalized and fair auto insurance, it also brings several challenges. Both insurers and consumers should consider these potential downsides when evaluating UBI options.
Final Thoughts on UBI
Overall, UBI offers a personalized approach to auto insurance that can reward safe driving and provide more accurate pricing based on individual behaviors. UBI also offers a compelling value proposition that can attract tech-savvy and cost-conscious consumers, giving UBI-embracing insurers a competitive edge. North America was the leader in the usage-based insurance market in 2023, and many American insurance companies are jumping on the UBI bandwagon. UBI isn’t going anywhere anytime soon.