More Auto Insurers Are Now Offering Usage-Based Insurance

Young woman sitting in the driver's seat of a car.

Getty Images / Christof Koepsel / Stringer

Chances are that if your auto insurer doesn’t offer usage-based insurance (UBI) also known as pay-as-you-drive (PAYD) insurance or pay-how-you-drive (PHYD) insurance, it soon will. With usage-based insurance, you allow a telematics device to be installed in your vehicle which in turn allows the insurance company to monitor your driving habits. If you are a safe driver, your good driving habits may earn you a lower insurance premium than other people who have bad driving habits. According to the National Association of Insurance Commissioners (NAIC), approximately 20% of all auto insurers will offer usage-based insurance within the next five years.

Once the telematics device is installed in your vehicle, it monitors your driving habits and records them. Some of the activities monitored include where and when you drive, the number of miles you drive, any periods of rapid acceleration or hard braking. While some drivers have voiced concerns regarding the privacy of personal data gathered, top companies offering usage-based insurance, such as Progressive Insurance, report that there is no interest in tracking drivers’ personal data and the data is not shared with any third parties.

Usage-Based Auto Insurance vs. Traditional Auto Insurance

With a traditional auto insurance policy, your insurance premium is determined by a number of factors including past driving history, make and model of your vehicle, the mileage and how you use your vehicle (such as using the vehicle to drive long distances for work commutes or exclusively for recreational driving). What a traditional auto policy doesn’t take into account that is factored into the insurance premium by usage-based insurance is your present patterns of driving. For example, even though you’ve had accidents in the past, you may be a very safe driver now.

Usage-based insurance is a win-win for the policyholder and the insurance company in that it provides an incentive for the driver to adopt safer driving practices which in turn, lower the number of accidents and the number of claims the insurance company has to pay out. One advantage to the policyholder is that if you make changes during the month that would affect your premium.

While usage-based auto insurance may not be for everyone, people who are currently paying very high auto insurance premiums because they have been classified as high-risk drivers may find that usage-based insurance can reduce auto insurance premiums significantly. Not everyone’s insurance premium goes down with pay-as-you-drive insurance. While some people will receive significant savings, other drivers' insurance premiums will go up.

Even if your auto insurer offers usage-based insurance, it is a voluntary program and not mandatory. If you do not want your data gathered and sent to your insurance company by a telematics device, then this type of program may not be for you. If you have specific questions about what data is collected and how it is used, you should contact the insurance company offering the program. The insurance company should have a disclaimer on its website that tells more about its privacy policy and how any personal data gathered will be used.

The technology responsible for usage-based insurance also adds the possibility for other driver services that many insurance consumers may find beneficial such as vehicle wellness reports, vehicle theft tracking, and automated emergency response capabilities. It is possible that in the future, many auto insurers will begin incorporating these features into UBI programs.

What Insurance Is Best For You

Before deciding on any type of usage-based auto insurance program, it is best to do your homework. Read up on the company offering the program and read user testimonials of how the program worked for them. You can read about the customer experiences of auto policyholders who are using usage-based insurance including these companies who are now offering usage-based insurance: Nationwide Insurance (Nationwide SmartRide Program); Esurance (Esurance DriveSense Program); Safeco (Safeco Rewind-this program offers accident forgiveness in the form of removing surcharges from your auto policy premium for safe driving); and Metromile, which bases your auto insurance premium on the amount of miles you drive.

With the trend for usage-based auto insurance on the rise, you can be sure more and more auto insurers will begin offering these programs to their policyholders in the near future.