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Usage-based insurance (UBI)
Usage-based insurance (UBI), also referred to as pay as you drive (PAYD), pay how you drive (PHYD), and mile-based auto insurance, is a type of vehicle insurance where the costs are determined by various factors such as the type of vehicle used, time, distance, behavior, and location.
This approach differs from traditional insurance, which aims to distinguish and reward “safe” drivers by offering them lower premiums and potential no-claims bonuses. However, traditional differentiation is often based on historical data rather than current driving patterns. Consequently, it may take a significant amount of time for safer (or riskier) driving habits and lifestyle changes to influence insurance premiums.
Concept
The most straightforward form of usage-based insurance focuses solely on the distance driven. However, the broader concept of pay as you drive encompasses any insurance scheme where the costs are influenced not only by the amount of driving but also by how, where, and when the vehicle is driven.
Pay as you drive (PAYD) entails insurance premiums that are calculated in real-time, typically based on the mileage driven. There are three primary types of usage-based insurance:
1. Coverage is determined by the vehicle’s odometer reading.
2. Coverage is calculated based on mileage derived from GPS data or the number of minutes the vehicle is in use, recorded by a vehicle-independent module transmitting data via cellphone or RF technology.
3. Coverage is based on various data collected from the vehicle, such as speed, time of day, historical road risk, driving behavior, in addition to distance and time traveled.
The formula for determining premiums can be as straightforward as a function of miles driven or can become more complex, taking into account factors like the type of driving or the identity of the driver. Additional details can be incorporated, such as an extra risk premium for drivers who continuously drive without breaks, use their mobile phones while driving, or exceed speed limits.
Telematic usage-based insurance, specifically the latter two types (where vehicle data is automatically transmitted to the system), offers a more immediate feedback loop to drivers by adjusting insurance costs dynamically based on changing risk factors. This incentivizes drivers to adopt safer driving practices. For instance, if a commuter switches to public transport or remote work, the reduced risk of rush hour accidents would be instantly reflected in their monthly car insurance costs with usage-based insurance.
Furthermore, another variant of usage-based insurance is PHYD (Pay How You Drive). PHYD is similar to PAYD but incorporates additional sensors like accelerometers to monitor driving behavior in greater detail.
Potential Benefits
There are several advantages associated with the adoption of usage-based insurance (UBI) and pay-as-you-drive (PAYD) insurance programs:
1. Social and Environmental Benefits:
UBI and PAYD encourage more responsible and less unnecessary driving, leading to reduced traffic congestion, lower carbon emissions, and improved road safety.
2. Commercial Benefits:
Insurance companies can align their offerings more effectively with actual risk, resulting in improved customer segmentation and reduced claims costs.
3. Cost-Savings:
Responsible customers who drive less or exhibit safe driving behaviors may enjoy potential cost-savings on their insurance premiums.
4. Technology Integration:
UBI and PAYD technology can enable various vehicle-to-infrastructure solutions, such as drive-through payments and emergency road assistance, enhancing overall convenience and safety.
5. Consumer Choice:
These insurance options provide consumers with more choices in selecting the type of coverage that suits their driving habits and preferences.
6. Affordable Insurance for Young Drivers:
UBI and PAYD offer young drivers access to more affordable insurance rates based on their individual driving behaviors rather than subsidizing the costs of irresponsible peers.
7. Incentive for Safer Driving:
Higher-risk drivers pay more per use, creating a strong incentive for them to improve their driving habits or consider alternative transportation methods, ultimately contributing to safer roads.
8. Enhanced Security:
Continuous tracking of vehicle location enhances personal and vehicle security, enabling GPS technology to trace vehicles in the event of accidents, breakdowns, or theft.
9. Additional Benefits:
GPS technology used in these programs can provide consumers with non-insurance benefits like satellite navigation.
10. Gamification:
Gamifying the data encourages good driver behavior by allowing individuals to compare their driving habits with those of others, motivating them to drive more responsibly.
Potential Drawbacks
Usage-based insurance (UBI) and other insurance systems have certain limitations when it comes to predicting future risk:
1. Risk Subsidization:
Even with UBI, it’s challenging to completely eliminate the subsidization of higher-risk drivers by lower-risk drivers to some extent.
2. Privacy Concerns:
UBI systems often require the documentation of driving habits, which can raise privacy concerns. Continuous GPS tracking, in particular, may be viewed as intrusive. Personal information, including location, can be inferred from data such as speed and distance driven, potentially compromising privacy.
3. Comparability Challenges:
Pricing plans based on driver behavior can be complex and vary between insurance companies. This can make it more difficult for consumers to compare plans and find the most competitive options, potentially reducing market competition.
Potential Drawbacks
Numerous patents and patent applications related to telematic auto insurance have been filed globally. Some notable examples include:
1. EP 0700009:
Titled “Individual evaluation system for motorcar risk,” addressing personalized risk assessment for motor vehicles.
2. US 5797134:
Progressive Auto Insurance’s patent titled “Motor vehicle monitoring system for determining a cost of insurance,” which relates to a system for monitoring vehicles to calculate insurance costs.
3. EP 2803046:
Filed by Movelo, this patent is related to the reporting of meter indications for telematic systems.
4. EP 2812871A1:
Also from Movelo, this patent involves the determination of the activity rate of portable electronic equipment within vehicles.
5. JP application 2002259708:
A patent titled “Vehicular Insurance Bill Calculating System, On-Vehicle Device, and Server Device” by Toyota, focusing on insurance billing calculations for vehicles.
6. WO application 2005083605:
AIOI Insurance Company’s patent application related to an insurance fee calculation device and method.
To prevent potential patent conflicts, Norwich Union acquired the UK version of EP0700009 and secured an exclusive license for any EU patents that might result from Progressive’s EU patent applications.
In June 2010, Progressive Auto Insurance initiated a patent infringement lawsuit against Liberty Mutual concerning one of Progressive’s Pay As You Drive auto insurance patents.
In September 2010, Progressive Auto Insurance filed a declaratory judgment lawsuit against Hughes Telematics, seeking to have several of its patents covering OBDII-mounted wireless data loggers declared invalid. Progressive employs such devices through a competing supplier, Xirgo Technologies.
Impaired Driving
Telematics technology has been suggested for identifying distracted driving behaviors. It has also been proposed to employ telematics for detecting instances of drunk driving and texting while driving. A U.S. patent application that integrates this technology with a usage-based insurance product was made available for public review and comments through the peer-to-patent platform.
