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Is Usage Based Insurance the Future?

From pay as you go cell phones to renting out your house to tourists, usage-based programs provide services and generate income. Usage Based Insurance, or UBI, provides insurance companies with detailed information about driving habits while offering a means to a lower premium payment.

Usage-Based Companies

Uber offers transportation options such as taxis, private cars and rideshares through a smart phone app. Lyft also offers transportation services.  AirBNB offers accommodations in private homes and other non-hotel locations. There is even a service that offers access to clean restrooms for a fee, AirPNP.

The insurance industry is embracing the technology supporting UBI. It is only a matter of time before many other industries jump on the usage-based bandwagon.

Insurance for Usage-Based Business

The concept of UBI brings up some issues with other usage-based businesses. Several matters require resolution in this new area of commerce. Recently, some questions arose about the liability involved with certain usage-based schemes. For services such as Lyft and Uber, any driver first must have automobile insurance. The companies also carry liability policies, but only in the neighborhood of $1,000,000, often insufficient to cover damages in cases of accidents and injuries. Many drivers’ policies will not pay on accidents sustained while driving paying customers in the car. In all probability, these services will end up requiring commercial drivers insurance, such as what taxi drivers and limo drivers have.

Usage Based Insurance Coverage

The concept of usage-based insurance is not all that novel. Churches have no need for a liquor license and insurance covering every day of the year. However, holiday parties, bazaars, and fundraisers often feature bars as a part of the money-raising plan. How do they protect themselves for those few occasions when they sell liquor? With temporary insurance coverage. It is the same with car rentals. If the renter has no car insurance policy, he or she must pay for rental insurance.

The Technology Behind UBI

UBI is not an on again/off again insurance, but rather specifically tailored insurance coverage. Usage-based insurance coverage is now common. According to the National Association of Insurance Commissioners, assessing certain things about driving habits helps determine the proper premium payment. The variables include:

  • Miles driven
  • Locations
  • Rapid acceleration
  • Hard breaking
  • Hard cornering
  • Air bag deployment

Concisely, the concept behind UBI telemetric information is, the worse (more dangerous) the driving, the higher the premium. (UBI) uses telematics to record how the driver behaves. Telematics are easily installed gadgets that track and report the number of miles driven and the driving behavior of the driver.

The idea is to encourage good driving by giving those who agree to constant monitoring a reduced premium rate. Better driving habits result in reduced insurance claims, and thus, higher profits.

The technology provides more than just insurance coverage information, however. For example, DriveSync® offers several safe-driving products, including DriveSync for Android, which makes possible safer in car texting through completely voice-powered technology. IMS, a telematics service provider, also promotes the system as a means of uncovering new revenue resources by offering clients things such as:

  • Traffic reports
  • Weather reports
  • Vehicle diagnostics
  • Roadside assistance
  • Infotainment

Usage Based Car Insurance Coverage

Many large car insurance providers have programs using telemetrics.

  • Sprint, partnered with Intelligent Mechantronic Systems, offers usage-based insurance services.
  • Progressive Insurance has the Snapshot program. For now, it analyzes the number of miles traveled, the time of day driving occurs, and “hard braking.”
  • Allstate offers Drivewise, where customers use a device to collect data on their driving behaviors, with rewards for good driving habits, although it also claims it “provides feedback that can help your driving and won't hurt your rates.”
  • State Farm offers In-Drive UBI
  • Liberty Mutual offers On Board, but only for commercial fleets.

Consumer Privacy Concerns

Obviously, for cautious, law abiding drivers, UBI done through tracking can result in lower insurance premiums. However, many find this method quite intrusive, and there may well be litigation in the future regarding privacy concerns and UBI tracking.

An article at InsuranceJournal.com referenced a recent University of Colorado study, which warned that UBI programs could collect data (such as drivers’ destinations) without the driver ever knowing about it. Additionally, according to the report, a GPS is not needed to find a driver’s destination, only a rather simple algorithm using data collected from a simple UBI device. The study recommends customers be specifically apprised of the data collecting abilities of UBI programs and how it could affect them.   

The Growth of Technology

Insurance Journal reports that insurance providers have been playing around with UBI technology for over 15 years, and that it will likely become a standard product. The future of UBI coverage may come in the form of more sophisticated devices capable of collecting and transmitting information that is even more detailed. However, it is all a work in progress, with companies assessing just how much things such as mileage and driving times really help predict future losses. Each technological innovation requires analysis for determining the proper means of use. In the end, the information provided by the technology may be quite useful, but we must never lose sight of the possible cost.

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