Usage-Based Insurance (UBI) is a way to price insurance. With UBI, how you drive affects your premium. The more safely you drive, the less you pay. Before we talk about UBI, let’s discuss traditional insurance pricing.
Traditional insurance pricing uses many rating factors :
While many of these factors correlate with risk and predict future claims, they are only proxies. They don’t embody the actual risk associated with someone’s driving behavior.
With traditional insurance rating factors, pricing segmentation is coarser, not personalized for the individual.
As a result, good drivers may pay more than they should. They subsidize bad drivers, or “rate suckers”, as Progressive calls them.
Insurers that don’t use personalized segmentation can lose profitable customers and increase claims losses. Good drivers who pay too much will leave. Bad drivers who pay too little may stay.
That’s where UBI comes in.
UBI is a way to price insurance where how you drive affects your premium.
Some rating factors include:
More of any of these factors is riskier. More risk equals higher premiums.
With traditional insurance, insurers offer a fixed price on demographic and historical factors. With UBI, they offer personal pricing based on current individual behavior.
As a result, UBI captures individual risk. Pricing is fairer and more profitable.
UBI also helps drivers lower their premiums by driving more safely.
Insurers use telematics to collect vehicle and driving data. Some telematics solutions use GPS to get location data. Some don’t. There are several different methods.
Many UBI providers also enrich the driving data. They add weather, road and speed limit data to provide more context. For example, it’s riskier to drive 70 MPH in a blizzard than on a clear sunny day.
Insurers use different models based on their strategies and book of business. Insurers vary their terminology based on marketing but here are some:
Most programs provide premium discounts for driving less and driving safer. Some insurers will offer a small discount upfront so that people will try UBI. Others may offer a discount only after a certain evaluation period. Some offer both.
Some of the most well-known programs in the US include:
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