What Is Usage-Based Insurance and Other Trending Insurance Questions?

During COVID-19, there was a drastic decrease in vehicles on the road, which raised concerns among personal and commercial vehicle owners that they were overpaying for the cover of vehicles that never left the driveway. In many ways, concerns like that led to the rise of the usage-based insurance (UBI) concept, where premiums are charged based on the vehicle’s mileage and the driver’s behavior. 

Usage-based insurance can be broadly categorized into the following types:

  • Pay-as-you-drive (PAYD) – Depends upon the mileage of the vehicle used.
  • Pay-how-you-drive (PHYD) – Depends upon the driver’s behavior.
  • Pay-as-you-go (PAYG) – A combination of PAYD and PHYD. 
  • Distance-based insurance – Based on the number of miles a vehicle has covered over the policy period. 

In this article, we will discuss different aspects of usage-based insurance. Without further ado, let’s get right into them.

Why Is Usage-based Insurance Trending?

UBI is a new concept that’s becoming more visible lately and promises to be more widely accepted and adopted soon. Compared to conventional insurance, UBI, with technological support, could fit well into the wide portfolio of other auto insurance policies. 

New-age insurers prefer technology-integrated services giving UBI an edge over existing car insurance policies in terms of carving out personalized solutions. In fact, by 2026, UBI is expected to reach a market size of $66.8 billion (up from $19.6 billion documented in 2021) at an exceptionally healthy CAGR of 27.7%.

The introduction of telematics in the UBI has further added to its popularity among insurers and consumers. Telematics devices installed in the vehicles allow insurers to track drivers’ behavior in real-time. It does so by collecting and transmitting continuous data on the vehicle’s acceleration, braking, speeding, and location. The following section dives deeper into the association between UBI and telematics.

What Is Telematics and How Is It Associated with Usage-based Insurance?

Telematics is a branch of IT that is now being used by insurers to track the mileage of the vehicle and the driver’s behavior. This data is used to analyze the associated risks and calculate the premium for UBI.

Telematics in UBI is used in three major forms, as follows:

  • A hardware device is pre-installed in the vehicle by the manufacturers.
  • A plug-in device that can be installed by the user.
  • Smartphone-based cloud solutions and apps with remote accessibility.

Currently, smartphone technology is taking over the UBI market, predominantly because of the young population being prolific users of tech solutions. Concerns about data privacy and worries about how consumer movements and behavior will be tracked, reported, and secured do exist but the industry expects that robust privacy and usage policies will emerge soon enough.

Let’s now explore the UBI trends in more detail.

What Are the Latest Usage-Based Insurance Trends?

According to a report by Capgemini Group, the following are some of the high-impact technology trends in the UBI industry that are expected to drive the insurance value chain. 

  • IoT: Data-based connected insurance – the rise of IoT has helped in the adoption of telematics in the automotive and transportation sectors.
  • Gamification of insurance processes: Best for boosting user engagement by introducing game-design elements in non-game contexts. 
  • Application-powered insurance: It will facilitate a high-adoption rate of wireless technology.
  • Customer adherence apps: Mobile technology-based solution that is specific to healthcare insurance.

Who Can Benefit from Usage-based Insurance?

UBI can cater to a wide range of audiences with its unique approach. Below are the categories of drivers for whom UBI can serve a better purpose than conventional insurance policies. 

  • Infrequent drivers: UBI premium is low for these consumers because of low mileage.
  • Young drivers: This category of drivers falls under the high-risk segment, which leads to high premiums that can be brought down in favor of safe driving practices.
  • Drivers with low credit scores: Conventional insurance policies have high premiums for drivers with low credit scores, but UBI doesn’t take that into account. 
  • Drivers with a claim history: UBI does not calculate premiums based on the driver’s claim history. So, they don’t have to pay increased premiums and lose their right to no-claim discounts, unlike conventional insurance policies. 

Get Help from the Experts

Being one of the leading companies in the insurance industry, we offer the finest insurance solutions ranging from custom personal policies to uniquely tailored business programs. 

If you are looking to know more about usage-based or connected auto insurance for commercial or personal needs and how you could prepare for their eventual arrival, we can help you choose the best solution for your requirements. Connect with our expert team to learn more.