What’s “usage-based insurance” all about?



You may have heard the term “usage based insurance” or UBI and wondered if it’s right for you. Essentially, UBI is technology called telematics that monitors your actual driving behavior and experience. It may be a device installed on your car or on your phone. It can measure many variables, including what, when, where, and how you drive. The collected data is used by insurers to help determine the cost of your insurance.

Expect to hear more and more about UBI. Today, availability is limited to some insurers and some states and it is a choice you make as a consumer. Expect it to continue growing as a mechanism for pricing auto insurance. It’s estimated that by 2020, about 70% of all insurers will use telematics, according to the National Association of Insurance Commissioners (NAIC).

For a good overview, NAIC offers a one page explainer: Understanding Usage-Based Insurance. Or if you’d like a deeper dive on the topic, you can read their trend report on Usage-Base Insurance and Telematics.

NAIC describes how UBI insurance premiums are determined vs how traditional premiums are determined:

“There are several variations of UBI including pay-as-you-drive, pay-how-you-drive, pay-as-you-go and distance-based insurance. These options are different from how insurers charge for traditional auto insurance. Traditional auto insurance relies on actuarial analysis of data including driving record, credit-based insurance score, personal characteristics, vehicle type, garage location and more. A UBI program adds individual driving behaviors as an additional rating factor.

UBI may have a direct impact on your premium as UBI programs associate costs with individual and current driving behaviors instead of relying on statistics based on past trends and events.”

By tracking data, good or infrequent drivers will pay less and frequent or higher risk drivers will pay more. It’s expected that this could yield significant benefits for businesses in managing fleets. In the one-page article linked above, NAIC discusses the pros and cons of this approach for individuals. One frequently cited downside is the issue of privacy – some drivers just don’t like the idea of being tracked; others worry that collected data could be shared with or sold to third parties. Many state regulators are monitoring the privacy issue and requiring disclosure of tracking practices and devices.

Right now, if you talk about telematics and insurance, it is primarily an issue for auto insurance. But expect that some practices may also make their way into home insurance too. While there are still some barriers to adoption there – privacy being one – “smart technologies” or “the Internet of Things” mean that more and more home systems will be able to be measured and tracked. For more on this, see Smartest house on the block: Home telematics and their window for insurers.