Usage-based insurance programs

Pay-per mile, Pay-as-you-go, and Pay-as-you-drive

A Concise Overview

 

  • – There are a number of types of usage-based insurance programs, including pay-per-mile, pay-as-you-go, and pay-as-you-drive
  • – Only two usage-based insurance companies currently offer purely usage-based insurance policies: Usage-based insurance startups Root and Metromile
  • – Most major insurance companies offer some form of usage-based insurance discount

 


Usage-based insurance programs (UBI), also commonly called pay-per-mile insurance, pay-as-you-go insurance, pay-as-you-drive, or pay-per-use insurance; are a growing form of insurance technology (both in the United States and globally) that allows drivers to receive rates based on their individual driving statistics.

In this guide, we’ll walk through key features of pay-as-you-go car insurance and other usage-based insurance types; ways it may save you money; common criticisms; penetration of pay-as-you-drive auto insurance in South Africa, Italy, and Singapore, compared to the United States; and more.

When you’re shopping for auto insurance, pay-as-you-go may be an option for you. Keep reading to find out what you need to know about pay-as-you-go insurance, including how to buy auto insurance with a usage-based discount.

Before we get started, use your ZIP code to get free quotes. While usage-based insurance rates on auto insurance are hard to offer due to the need for data, comparing standard rates with the potential discounts can help you see how affordable usage-based insurance can be.

What is Usage-Based Insurance?

Firstly, UBI is an individualized insurance service, based on a telematic analysis of drivers. Each driver receives a personalized insurance rate based on their own driving, factoring in the type of road used (freeway or urban), braking, and cornering.

This pay-as-you-use auto insurance often enables drivers to save money both on base rates and through discounts.

There are a few main forms of UBI, each with a slightly different means of calculating your risk level, and therefore your rate.

The most common forms of UBI are pay-as-you go auto insurance and pay-as-you-drive insurance; both work on broadly the same principle: that your driving is monitored to calculate your rate, and you are not given an ‘off the rack’ insurance quote. Ultimately, you are purchasing auto insurance based on driving habits, which can save you money, particularly if you are a safe driver.

Keep reading to learn more specifics about the different kinds of UBI.

Pay-per-mile,
Pay-as-you-go insurance or Pay-as-you-drive (PAYD)

Pay-as-you-drive and Pay-as-you-go auto insurance both effectively work as a pay-per-mile auto insurance rate. 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 rates are around half the price under a pay-per-mile or by-the-mile auto insurance system, compared to using regular insurance.

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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.

So how does pay-per-mile work? Pay-per-mile works as you might expect, by tracking the number of miles you drive each day, week, and month (in some cases they also track how you drive). Rates are generated based on this tracked mileage.

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 questions.

As you can see, pay-per-mile, pay-as-you-drive, and pay-as-you-go auto insurance all mean basically the same coverage and provide a way to lower your insurance rate. In the next two sections, we’ll look at the other two primary forms of UBI.

Pay-how-you-drive (PHYD)

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 uses it to gauge the riskiness of your driving. Based on this, insurance companies can provide additional benefits to shape driving behavior, such as a reduction in rates if ‘gentle acceleration’ targets are met.

Manage-how-you-drive (MHYD)

Manage-how-you-drive insurance is still a relatively new form of UBI. It functions in a similar way to pay-how-you-drive insurance although it is a more dynamic auto insurance, offering near-instantaneous rate information.

In effect, manage-how-you-drive is pay-how-you-drive with quicker feedback.

Because of fluctuations in cost, insurance companies have been slower to offer it, although it is likely to become more popular in the future, particularly as telematics technology increases in effectiveness and market penetration.

Which auto insurance companies offer usage-based insurance?

Most major insurance companies typically offer usage-based discounts, rather than entirely usage-based insurance rates. So where can you buy usage-based insurance? To-date, only two companies offer true usage-based insurance: Root and Metromile.
Both of these companies only sell usage-based policies. With Root, you’ll be required to install the company’s app on your phone in order to apply for coverage, file claims, track your driving behavior, etc. The company currently offers coverage in 28 states.
In the case of Metromile, you can purchase policies based on your mileage or your driving behavior, depending on your preference and how you choose to allow the company to track your driving. At this time, you’ll only be able to purchase Metromile in eight states, however.
Take a look at this table for a full list of Root and Metromile availability.

Metromile and Root Insurance Policy Availability by State
StateMetromile Policies are Available for PurchaseRoot Policies are Available for Purchase
AlabamaNoNo
AlaskaNoNo
ArizonaYesYes
ArkansasNoYes
CaliforniaYesYes
ColoradoNoYes
ConnecticutNoYes
DelawareNoYes
District of ColumbiaNoNo
FloridaNoNo
GeorgiaNoYes
HawaiiNoNo
IdahoNoNo
IllinoisYesYes
IndianaNoYes
IowaNoYes
KansesNoNo
KentuckyNoYes
LouisianaNoYes
MaineNoNo
MarylandNoYes
MassachusettsNoNo
MichiganNoNo
MinnesotaNoNo
MississipiNoYes
MissouriNoYes
MontanaNoYes
NebraskaNoYes
NevadaNoNo
New HampshireNoNo
New JerseyYesNo
New MexicoNoYes
New YorkNoNo
North CarolinaNoNo
North DakotaNoYes
OhioNoYes
OklahomaNoYes
OregonYesYes
PennsylvaniaYesYes
Rhode IslandNoNo
South CarolinaNoYes
South DakotaNoNo
TennesseeNoYes
TexasNoYes
UtahNoYes
VermontNoNo
VirginiaYesYes
WashingtonYesNo
West VirginiaNoNo
WisconsinNoNo
WyomingNoNo
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If you’re interested in either of these policy-types, you can find out more by speaking with an insurance or agent, or as we already noted, downloading the Root app.

Which auto insurance companies offer usage-based auto insurance discounts?

Most of the major insurance companies do offer some form of usage-based insurance discount. To see a list of some of the companies that offer usage-based discounts, take a look at this table.

Usage-Based Discounts Offered by Company
DiscountsOffers Driving Device/App (Telematics) DiscountOffers Low Mileage Discount
21st CenturyNoNo
AAAYesYes
AllstateYesYes
American FamilyYesYes
AmeripriseNoNo
AmicaNoYes
Country FinancialNoYes
EsuranceYesYes
FarmersNoYes
GeicoYesYes
Liberty MutualYesYes
MetLifeYesYes
NationwideYesYes
ProgressiveYesYes
Safe AutoNoNo
SafecoYesYes
State FarmYesYes
The GeneralNoYes
The HanoverNoYes
The HartfordYesYes
TravelersYesYes
USAAYesYes
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As you can see, these are primarily telematics-based (which we’ll discuss in further detail in the next section), but some are also simply based on your average annual mileage.

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Usage-Based Technology and Auto Insurance

UBI technology works by transmitting information from 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.

What usage-based technology is currently in use? The four current pieces of technology available are:

Black box

Black boxes are devices installed (usually professionally) in your car that can track a variety of metrics.

These automatically provide information to pay-as-you-go insurance companies about your driving.

Dongle

Dongles are small devices designed to connect with the USB port in your car. Unlike the black boxes, car insurance dongles can be easily removed by drivers.

Smartphone

Smartphones are still relatively underused when it comes to telematics. However, generally, 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.

Embedded

Embedded telematics works with the factory-installed software in your car. If you have Apple CarPlay or other similar software, an embedded system can integrate with that and monitor your driving. Embedded telematics is one of the fastest growing areas of pay-per-mile technology (driven in part by the growth in factory-installed software in cars).

As the graph below demonstrates, 1.5 million cars with embedded telematics were bought in 2009, compared with 36 million in 2018.

Global Sales of cars with embedded telematics from 2009 through 2018

(in 1000 units)

Sixty percent 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.

Because of the technological advances making usage-based insurance ever more feasible, it is set to be an increasingly common way for drivers to get insurance. Let’s look at some usage-based insurance statistics.

In 2013, for example, 5.5 million drivers globally had a usage-based insurance policy.

In 2018, it was 107 million—an increase of nearly twenty times. In the United States, 13 percent of drivers had a UBI policy in 2013, and as of 2015 it was up to 20 percent.

Furthermore, the market as it stands is already extremely valuable. According to Allied Market Research, the global market for telematics was $50.4 billion in 2018 and is projected to be valued at $320.6 billion by 2026, which is a 536 percent increase over eight years.

In 2018, Progressive’s Snapshot program, which works as a usage-based insurance policy, was worth $5.5 billion in policy premiums.

How common is telematics technology? Take a look at this graphic to see the market penetration of telematics in the United States compared to other key countries pursuing this technology, according to the McKinsey Center for Future Mobility.

As the information shows, the United States has the highest levels of usage-based insurance market penetration for telematics (the technology that underpins UBI), with 20 percent of cars having telematics.

Telematics penetration rate worldwide in 2016, by key country:

  • United states – 20%

  • Italy – 17%

  • South Africa – 12%

  • Singapore – 9%

However, this level is still relatively low, particularly given the recent advances in GPS technology that makes UBI more viable.

Additionally, more cars are being manufactured with embedded telematics technology. Italy leads the European countries, although many market forecasters state that pay-per-mile insurance or pay-as-you-drive auto insurance in the UK and Germany are likely to increase and be major markets for UBI in the near future.

Usage-based insurance is likely to be a major player in the future, whether by replacing traditional insurance policies or working in some way alongside the existing setup. Interested in the technology that makes vehicle telematics work? Take a look at the video below.

Either way, usage-based insurance is here to stay.

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What are the benefits of pay-as-you-go insurance?

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 on 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.

Financial Benefits

The most obvious potential benefit for a pay-as-you-go system is that it can reduce your rates.

If you are a safer driver than your demographic would suggest, you’re likely to see the benefits almost immediately. In particular, this could have an impact on auto insurance for teens (16-20) who traditionally see the highest rates. Teen drivers traditionally pay up to 197 and 239 percent more for insurance than drivers at ages 25 and 35, respectively.

If you don’t drive much, you will also see benefits, particularly if your average is less than 10,000 miles in a year. You should see a sizable discount by using a mileage-based policy. And that discount may not be your only benefit; committing to walking whenever possible, for instance, can help not only reduce your auto insurance rates, but also keep you healthier.

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 rate 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 rates, 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.

When accidents do happen, the use of telematic data to determine who was at fault will ensure that poor drivers are punished, and not good drivers. Again, this will keep insurance costs down and will provide further incentives for good driving.

One benefit discussed within the wider insurance community is that pay-as-you-drive insurance may actually be an environmentally-sound approach too, as it disincentivizes driving.

Because drivers are, in effect, penalized for the miles they drive, over time non-essential trips may decrease. This may also push drivers toward public transport, thus keeping cars off the road, which in turn benefits the environment and limits congestion.

Safety/Security Benefits

Greater information and tracking technology in cars will also have safety and security benefits. For example, the presence of a black box or other tracking device in a vehicle will make it easier to recover vehicles after a theft (and presumably, therefore, decrease car theft). This will result in further reductions in insurance rates.

Tracking technology will also support emergency response’s ability to get to a vehicle in the case of an emergency. For parents, it may offer peace of mind to know they can monitor their teen drivers..

In fact, a recent study has shown that parents told about the possibility of knowing how their child drives resulted in their being 45 percent more likely to adopt pay-as-you-go auto insurance.

What are the disadvantages of usage-based insurance?

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 outweigh the benefits.

The biggest objection is the amount of personal data that usage-based insurance requires a driver to 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 Equifax and Facebook, consumers fear that the vulnerability of their data makes sharing location information a risky proposition.

Furthermore, with so much data being collected, the temptation for insurers to sell data means even if data is safe, it may be shared.

In response to these concerns, some states have enacted laws that specifically define who owns the data collected through telematic devices, how companies are permitted to use the data, when and how companies must disclose data collection and usage, etc. Studies have shown, however, that consumers are growing more comfortable with the concept of information sharing.

Towers Watson reports that a growing number of consumers now regard sharing personal driving information as comparable with online banking security, and more secure than social media information, as depicted in this graphic.

  • 35%Driving Data

  • 36%Online Banking Data

  • 29%Internet Search Data

  • 27%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 use, particularly among young drivers.

  • Thirty-four percent of overall consumers said they would be interested in a smartphone-based pay-as-you-go insurance plan, and 80 percent of smartphone users said 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.

Some companies like the Go auto insurance company (also referred to as gosafeinsurance.com) are taking advantage of this increased interest in app-based insurance and tracking by offering an entirely app-based experience for drivers (similar to Root Insurance), with regular in-app reminders and suggestions for how to save money and drive more safely.

Pay-as-you-go auto insurance is likely to be the most important change that happens in car insurance within the next decade. Certainly, insurance companies are investing in ever-better technology and marketing for their pay-per-mile policies.

Given that insurance companies benefit as much as the consumer, it’s easy to see why. Compared with traditional policies that rely on generalized information, pay-as-you-go insurance is far more targeted to individual drivers.

The Bottom Line for Usage-Based Insurance Programs

 

Pay-as-you-go auto insurance is likely to be the most important change that happens in car insurance within the next decade. Certainly, insurance companies are investing in ever-better technology and marketing for their pay-per-mile policies.

Given that insurance companies benefit as much as the consumer, it’s easy to see why. Compared with traditional policies that rely on generalized information, pay-as-you-go insurance is far more targeted to individual drivers.

From a purely economic perspective, providing incentives for drivers to be safe and courteous is likely to result in a change in driving habits.

Those who will benefit most from the introduction of usage-based insurance will be teen drivers (or those who pay for their insurance). If a teen driver can demonstrate that they are a safe driver, then their insurance premiums will drop substantially. They will effectively no longer be punished for the behavior of the rest of their cohort.

For the rest of the driving community, those who are safe drivers, or who drive infrequently, will see benefits; those who drive often during busy times, or at night, are less likely to benefit.

Regardless, usage-based insurance’s rise seems inevitable—at least until the introduction of self-driving cars changes the whole game again.

Take a moment before you go to enter your ZIP code and get a free auto insurance quote to see how pay-as-you-drive insurance or other usage-based programs might decrease your rates.

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