What Is Usage-Based Auto Insurance?
Usage-based auto insurance (also called pay-as-you-drive, pay-how-you-drive, distance-based insurance, and telematics) offers drivers the option of having premiums tailored to their driving patterns. For example, drivers may be rewarded by paying less for insurance if they drive less and more safely.
The popularity of usage-based insurance (UBI) is on the rise in the U.S. since it emerged here more than 10 years ago. Who isn’t looking for a way to save money? But before you chuck your traditional insurance, look under the hood at the mechanics of this type of insurance to be sure it’s right for you.
What Is Usage-Based Auto Insurance?
Usage-based auto insurance allows an auto insurer to track various aspects of your driving, either by connecting directly to your car through a built-in or inserted device or by monitoring your activities through an app downloaded to your cell phone. The devices and apps measure different factors, such as vehicle miles traveled, speed, acceleration, hard braking, sharp turns, phone use while driving, location, and the time of day or night driven.
Telematic devices and apps gather real-time data and transmit the information to insurers, which use it to set rates, price new auto customers’ policies, and modify premiums when policies are renewed. Usage-based auto insurance uses algorithms to interpret the gathered data.
According to the Insurance Information Institute, nine of the top 10 private passenger auto insurers have UBI programs in place. Some car manufacturers are also partnering with insurers to offer similar policies to people who buy their cars. Research consulting firm PTOLEMUS found that there were 8 million UBI policies in the U.S. in 2018, but that was only about 5% of the nation’s car insurance market.
The amount of annual discount you may be granted for agreeing to UBI varies by state, but ranges from none in Hawaii, California, and Wyoming to $157 in Delaware.
UBI programs can apply to various auto insurance coverages, including liability coverage, collision coverage, medical payments coverage, and personal injury protection.
Pros and Cons of Usage-Based Auto Insurance
- Lower premiums
- Less chance for rate discrimination based on your profile
- Encourages safer driving
- Your personal data and whereabouts are tracked and analyzed
- Your data can be sold without your knowledge
- Device can malfunction, recording your driving data incorrectly
- Not good for drivers with high mileage or poor driving record
There’s plenty to like about UBI. Drive less and more safely and you can lower your premiums. You’re rated based on your actual mileage and your driving habits, which could be more advantageous than some factors traditionally used for pricing that can be discriminatory, like credit scores, occupation, education, and ZIP code. These can disproportionately harm low-income people and communities of color, according to the Consumer Federation of America.
UBI can lead to a more accurate calculation of risk and insurance premiums tied more closely to driving-related behavior. It also creates incentives for safer driving, which could lead to less dangerous roads for everyone and fewer claims for insurers.
But there are downsides. Michael DeLong, insurance advocate for the Consumer Federation of America pointed out that insurers have been unwilling to disclose their algorithms used in UBI, including the full scope of data they collect. He said he fears insurers could be tracking more about consumers than is necessary to assess risk, or monitoring things that lead to unfairly discriminatory pricing. There is also a lack of privacy protections for consumers: States regulate insurance, and most do not have comprehensive laws specifically focused on usage-based insurance.
Other potential negatives mentioned by DeLong include leeway for possible increases in rates and premiums without insurers having to justify all the elements used to determine the telematics-based price, the unauthorized sale or abuse of data for advertising or by other businesses, and security concerns. Hackers or other malicious actors could break into the devices, seize the data, and use it for their own ends.
Privacy Is Problematic
If you have specific questions about what data is collected in a UBI program and how it is used, you should contact the insurance company offering it.
The technology responsible for UBI also makes possible other driver services that 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, auto insurers will begin incorporating these features into UBI programs.
However, be aware that auto insurers refuse to be transparent about their telematics programs and the algorithms governing the devices, claiming that it would harm competition, DeLong of the CFA said. They also sometimes refuse to say what consumer information they collect, he said.
Further, the insurance advocate said he believes consumers and regulators need a full list of all factors that insurers collect with telematic programs, and the factors need to be relevant for auto insurance. For example, California law prohibits insurers from collecting any data other than actual mileage driven, which gives consumers a clear tool to help lower rates without subjecting them to unknown factors in an algorithm. DeLong said most states lack specific laws intended to oversee usage-based insurance, leaving the data collection and algorithms largely hidden from view.
Where Can I Get Usage-Based Car Insurance?
Several of the nation’s largest insurers offer usage-based programs, though not in all states. There are also some smaller, newer entrants in the market that are using or promising to introduce usage-based policies.
This type of insurance is ideal for excellent drivers and those who don’t get behind the wheel that often. However, traditional car insurance may be best for people who drive a lot and rack up miles, have poor driving records, or who work at night, as some UBI programs raise rates for night-time driving. Make sure to analyze your mileage and driving habits before you sign up for a telematics program or insurer.
- Usage-based insurance can save you money on your premiums
- Your driving behavior and habits affect your costs
- There are privacy issues if you allow UBI use; the breadth of your data that’s collected is unknown
Insurance Information Institute. "Background on: Pay-as-You-Drive Auto Insurance (Telematics)." Accessed Oct. 29, 2020.
PTOLEMUS. "UBI Infographic 2018." Accessed Oct. 29, 2020.
The Zebra. "Car Insurance With Telematics." Accessed Oct. 29, 2020.
Consumer Federation of America. "Systemic Racism in Auto Insurance Exists and Must Be Addressed By Insurance Commissioners and Lawmakers." Accessed Oct. 29, 2020.