What is usage based car insurance? It’s one of the most talked about changes in car insurance these days. It’s based on a pay as you go approach for car insurance pricing, which is much different from how car insurance has been priced. Insurance companies who provide usage based insurance, or UBI, are looking for safe drivers who don’t drive a lot and don’t mind having their driving monitored. To help better explain what it is, let’s contrast the old way insurance companies rate car policies versus using a usage based model.
Old Way: There are a number of factors car insurance companies use to determine your rate including type of car (sedan, SUV, truck, sports car, etc.), vehicle cost, zip code, driver(s) age, credit rating, home ownership and more. As an agent, I also ask how the car will be used. Is it driven to and from work, is it a pleasure vehicle driven by a homemaker or retired person, or is it driven by a sales person who makes outside sales calls (see https://wiseinsurancegroup.com/what-type-of-driver-are-you/)?
These factors are then processed through each insurance company’s system which spits out a rate. The more favorable the factors, the better the rate. All things being equal, the less a car is driven (no commute vs short commute vs long commute, etc.) the better the rate.
Accident claims and the presence of tickets provide an indication how well a person drives based on historical data, but they may be the wrong predictive metric. Monitoring an individual’s driving patterns may provide a better data set to predict future claim activity.
New Way: Usage based car insurance is based on the principle of pay as you go pricing. Traditional rating matrixes may continue to be used but they are used in conjunction with data gathered by a device called a dongle. A dongle is installed into a vehicle’s data port and uses telematics technology to monitor an individual’s driving. Driving patterns monitored include acceleration, braking, and time of day a person drivers. A few companies also capture where a person drives and the speed driven to rate the policy.
Progressive and Allstate were early pioneers in offering discounts based on the data gathered while monitoring an individual’s driving. They rolled out their programs when the technology became available 10 years ago. Other companies have followed suit over the past 2 years including Hartford, Safeco, esurance, Metromile, Nationwide, and National General. More companies are predicted to implement UBI programs in the coming 7 years.
In most cases, insurance companies provide a discount or waive an accident for monitoring a person’s driving for 90 to 120 days. Some companies are considering permanent UBI programs due to the changes in driving behavior from participating drivers. Over half of all participating drivers admit to changing their driving behavior when monitored. They don’t accelerate as quickly, slam on their brakes, and drive more defensively.
Better drivers make better risks for insurance companies and the savings given to participants is more than offset by lower claims. The two interesting questions are where will usage based insurance take us as consumers and will people become more receptive to having their driving monitored? What do you think? Share your thoughts, experiences, and questions with me on my Facebook, Google +, and LinkedIn pages. I’d love to hear from you!