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What is Usage-Based Insurance (UBI)?

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.

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How is Traditional Insurance Priced?

Traditional insurance pricing uses many rating factors :

  • Demographic factors like age, gender, home location and marital status
  • Vehicle factors like make, model, year and type
  • Driving record factors like violations, accidents and claims
  • Other factors like credit score

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.

  • Should all women pay the same premium, regardless of how they drive?
  • Should people pay high rates because they live in poor neighborhoods, regardless of how they drive?
  • Should people with bad credit pay more, regardless of how they drive?
  • Should a risky driver pay less because he hasn’t had an accident…yet?

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.

What is Usage Based Insurance?

UBI is a way to price insurance where how you drive affects your premium.

Some rating factors include:

  • Mileage
  • Location (e.g., you drive through many dangerous intersections)
  • Speeding
  • Braking (e.g., you follow other cars too closely)
  • Cornering
  • Night Driving
  • Distracted Driving (e.g., you text and drive)

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.

How Do Insurance Companies Collect Driving Behavior for UBI?

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.

  • In-Vehicle (“black boxes”): Professionals install these devices in the vehicle. They are expensive. Technology is obsolete before you know it.
  • OBD-II: Drivers plug these devices into the vehicle’s diagnostic port. They capture mileage, speed, braking and other vehicle measurements.  Progressive’s Snapshot is a good example.  Insurers pay for these devices and often give them for free to prospective customers.  OBD is still expensive because of the device, data plan, and distribution costs.
  • Smartphone: The driver installs an app on her phone.  The app uses the phone’s GPS and sensors to collect the same metrics as OBD.  Unlike OBD, smartphone apps also collect distracted driving behaviors like texting and calling.  A smartphone program like Censio’s can provide rating factors that are accurate enough for insurance pricing for 50-75% less cost than an OBD program.
  • Hybrid OBD-Smartphone: This approach combines smartphone and OBD – and typically links them via Bluetooth.

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.

What Are the Different UBI Business Models?

Insurers use different models based on their strategies and book of business.  Insurers vary their terminology based on marketing but here are some:

  • Pay As You Drive (PAYD): Mostly mileage-based.  The more miles you drive, the more you pay.  Premiums are pre-paid on a semi-annual or annual basis.
  • Pay How You Drive (PHYD): Like PAYD.  Includes other factors like speeding, braking, distracted driving and more.
  • Pay As You Go (PAYGO): Either PAYD or PHYD.  Drivers pay only for the trips they take after they take them.

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.

Who Offers UBI?

Some of the most well-known programs in the US include:

What do you think?

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