What Is Usage-based Insurance (UBI)?

The traditional model of vehicle insurance has always been geared towards rewarding good drivers. Often, discounts are applied after a length of time without any claims or tickets filed. Specific demographics are at an automatic advantage because of the law of averages surrounding age and location. These conventional stereotypes are somewhat outdated and fail to take into account how much society has changed. A male in his 20’s will pay a much higher premium than a woman in her 50’s, regardless of both having a clean driving record. It will take the male driver much longer to prove that they are competent and trustworthy enough to have a lower premium.


Usage-based insurance (UBI) was introduced about ten years ago. Since then, over eight million UBI insurance policies were created. The appeal of UBI is that it looks at insurance in a completely different way. Additional factors are taken into account beyond demographics, such as how many miles you drive and whether you tend to stick to speed limits. Your driving habits will impact how much you pay, in addition to your vehicle type and location. This concept can be very favorable for both insurance companies and drivers. The incentive to drive carefully means fewer claims being filed, and drivers benefit from lower rates. 


Depending on whether you chose the pay-as-you-drive (PAYD) or pay-how-you-drive (PHYD) package, different metrics are measured by UBI’s telematics. These telecommunication devices monitor vehicles via cellular, GPS, and onboard diagnostics and then display those movements on a computerized map. Data is also transmitted to the insurance company for review, and it is broken down into specific details, depending on whether you have a PAYD or PHYD policy. PAYD programs will usually charge a monthly fee on top of a per-mile charge. PHYD is more invasive, monitoring how you brake, accelerate, slow down, and turn corners. People who opt-in for UBI policies benefit from multiple discount opportunities. Some agencies reduce rates as a signing-up bonus. 


While telematics is a helpful tool for measuring real-time vehicle data, it doesn’t provide driver data. Newer iterations are software-based, saving everyone money by not having to pay for telematics devices. Mobile telematics is also more accurate because of its ability to measure distracted driving moments and offer rates based on an individual’s driving habits.