Usage-based insurance programs
Pay-per mile, Pay-as-you-go and Pay-as-you-drive
What is Usage Based Insurance?
Firstly, UBI is an individualized insurance service, based on a telematic analysis of drivers.
Each driver receives a personalized premium based on their own driving, factoring in the type of road used (freeway or urban), braking, and cornering.
There are three main forms of UBI, each with a slightly different means of calculating your risk level, and therefore the cost of your premium.
The most common forms of UBI are PAYD and PHYD, and both work on broadly the same principle: that your driving is monitored to calculate your premium, and you are not given an ‘off the peg’ insurance quote.
Pay-as-you-go insurance or Pay-as-you-drive (PAYD)
Pay-as-you-go insurance effectively works as a pay per mile insurance premium. Naturally, since the more you are on the road, the more likely you are to crash, insurers effectively charge you based on your road usage.
Insurance companies usually offer generous deals for those who drive fewer than 10,000 miles per year. It is estimated that for those driving fewer than 5,000 miles per year, insurance premiums are around half the price under a pay per mile insurance system compared to using regular insurance.
If you don’t put many miles on your car, this option is perfect for you. More and more companies are offering a pay as you go insurance plan that can help you save money.
Most companies will charge a very low base rate and then have a per mile fee. The per mile fee is usually pennies. The amount changes based on the amount of coverage you want for your vehicle and some other demographic question.
As you can see– pay-per-mile, pay-as-you-go and pay-as-you-drive insurance all mean basically the same coverage and provide a way to lower your insurance premium.
Pay-how-you-drive is the more technologically-advanced form of insurance premium. This works by constantly monitoring your car, and providing metrics such as:
What time of day you drive
How hard you brake
How quickly you accelerate
Sharpness of turns
Each of these provides advanced data to the insurance company, who use it to gauge how much of a risk your driving is. Furthermore, insurance companies can provide additional benefits to shape driving behavior, such as a reduction in premiums if ‘gentle acceleration’ targets are met.
MHYD is still a relatively new form of UBI. It functions in a similar way to PHYD although is more dynamic, offering near-instantaneous premium information. In effect, MYHD is PHYD with quicker feedback.
Because of fluctuations in cost, insurance companies have been slower to offer it, although it is likely to become ever-more popular in the future, particularly as the telematic technology increases.
How does pay as you go technology work?
Pay as you go insurance works by transmitting information from within your car to insurance companies. Because of the improvement in GPS technology in the last two decades, it is possible for a device within a car to measure extremely precise data, such as deceleration and lane-changing.
The four current pieces of technology available are:
Like their namesake in aircraft, black boxes are devices installed in your car that can track a variety of metrics.
These automatically provide information to your insurance company about your driving.
Dongles are small devices, designed to connect with the USB port in your car. Unlike the black boxes, these dongles can be easily removed by drivers.
Smartphones are still relatively underused when it comes to telematics. However, the basic premise is that the driver downloads an app, which monitors driving habits and relays this to the insurance company.
This technology is increasingly viable because of advances in GPS precision in the last decade.
60% of the current market of UBI uses the ‘Black Box’ device to collect data. Insurance companies are more comfortable with the permanent black box devices because it is far harder for them to be tampered with.
However, as more cars are now coming equipped with onboard computer interfaces, such as Apple CarPlay, there is a growing movement to include UBI-capable technology in this software.
Regardless of the means of accessing the telematics, the impact of a pay as you go insurance policy for a driver is contingent upon their driving ability, as well as the time and amount that they drive. This has major knock-on effects for drivers.
Because of technological advances making usage based insurance ever more feasible, it is set to be an increasingly common way for drivers to get insurance.
In 2013, for example, 5.5 million drivers globally had a usage based insurance policy.
In 2018, it is 107 million – an increase of nearly twenty times. In the United States, 13% of drivers had a UBI policy in 2013, as of 2015 it was up to 20%. Furthermore, the market as it stands is already extremely valuable.
In 2015, Progressive’s Snapshot program, which works as a usage based insurance policy, was worth $2.6 billion in policy premiums.
As the information below shows, the United States has the highest levels of market penetration for telematics (the technology that underpins UBI), with 20% of cars in 2016 having telematics.
telematics penetration rate worldwide in 2016, by key country
However, this level is still relatively low, particularly given the recent advances in GPS technology that makes UBI more viable.
Moreover, more cars are being created with embedded telematics technology. Italy leads the European countries, although many market forecasters state that the UK and Germany are likely to be major markets for UBI in the near future.
What are the benefits?
The potential benefits of pay as you go insurance are great. Generally, they can be divided into three main categories: financial benefits, benefits to society, and safety/security benefits. Most of these benefits are still in the future and are dependent upon a critical mass of people taking up pay per mile policies. Certainly, the impact of pay as you go insurance will be far easier to measure once a majority of drivers move to the system.
The most obvious potential benefit for a pay as you go system is that it can reduce your premiums.
If you are a safer driver than your demographic slice would suggest, then you’re likely to see the benefits almost immediately. In particular, this could have an impact on young drivers (16-20) who traditionally see the highest premiums.
Furthermore, if you don’t drive very many miles per year, then you will also see benefits, particularly if you drive fewer than 10,000 miles in a year. You should see a sizable discount my using a mileage based policy.
Finally, if your circumstances change midway through your policy (such as if you start working from home two days a week, or move nearer to your office) then you will see immediate premium reductions.
Benefits to Society
The most interesting benefits to a telematics-based system are those to wider society. In effect, the growing use of usage based insurance will provide a financial incentive to safer driving.
Those who drive recklessly, by accelerating and braking dramatically will see an increase in their premiums, and so most rational drivers will attempt to drive in a manner that causes fewer accidents.
Insurance companies will benefit because of a reduction in accidents, as will individual drivers, and society as a whole.
What are the criticisms of UBI?
Despite the benefits of pay as you go car insurance, there have been vocal critics of telematics who have claimed that the downsides of the technology outweighs the benefits.
The biggest objection is the amount of personal data that usage based insurance requires a driver send to their insurance company. Essentially, pay as you go auto insurance allows an insurance company to monitor a customer at all times.
In the light of data breaches from companies such as Experian and Facebook, consumers fear that the vulnerability of their data makes sharing location information a risky proposition.
Furthermore, the temptation for pay as you drive insurance to allow insurers to sell data means that even if data is safe, it may be shared.
Studies have shown, however, that consumers are growing ever more comfortable with the concept of information sharing. As the study by Towers Watson shows (below), consumers now regard sharing personal driving information as comparable with online banking security, and more secure than social media information.
Online Banking Data
Internet Search Data
Social Media Information
The second objection to usage based insurance has been the high installation cost, particularly of black box recorders.
However, the development of smartphone technology and the willingness of insurance companies to invest in their apps has led to greater uptake, particularly amongst young drivers.
34% of overall consumers said that they would be interested in a smartphone-based pay as you go insurance plan, and 80% of smartphone users said that they would be happy to download an app to monitor their driving.
The use of dynamic navigation apps such as Waze, which requires user information is likely to help make consumers more comfortable with sharing their information through an app.