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Car Odometer

Usage-based insurance (UBI) or pay-as-you-drive (PAYD) coverage is growing in popularity as automakers are making available advanced technology tools such as telematics. Is UBI or PAYD protection something for every driver to employ as primary auto insurance coverage? Auto insurance providers look to technological solutions to track driving behavior and determine their risk (potential for loss). UBI is a model for car insurance policy owners that may provide tremendous cost savings.

What Is Usage-Based Insurance?

UBI is simply a way a car insurance company tracks driving behavior and auto usage of the driver. This is accomplished through devices (telematics) which may already be installed in the vehicle or can be plugged in and enabled via mobile apps. The data derived through telematics devices provides an insurer with a basis for gauging behavior and your riskiness as a driver.

There are many different data points that can be measured through telematics, including:

  • How often your car is driven
  • Where the car goes
  • Number of miles accumulated (daily, weekly, monthly, etc.)
  • Type of driving you are engaged

The last point, "type of driving you are engaged" is an important one for determining your car insurance premium. The devices can measure hard braking, sharp cornering, speeding and incidents involving the deployment of your car's air bags.

Benefits And Concerns Associated With UBI

Telematics provide a more exacting measurement of your driving habits and behavior. This in turn translates to better potential auto insurance rates and an incentive to be a safe, careful driver on the roads. Unlike traditional car insurance pricing using actuarial methods, which measure the driving the behaviors of a population of drivers categorized in risk pools (i.e. age, geographical, etc.) in the aggregate, UBI's use of telematics measures your behavior on an individual or personal level. This means you are judged on your behavior and activity solely and not on that of an entire pool of drivers, where your premium cost falls somewhere within in the medial of the pool.

A chief concern arising from the use of telematics to track driving behavior is that of personal privacy. There is a lot of information that is tracked, which has triggered some states to place restrictions on the collection of data or require certain disclosures be made to consumers. As more and more states and insurers see a growth in UBI programs there will wider adoption and acceptance by car insurance consumers. The trick will be to balance consumer concerns (such as privacy) with the gathering of meaningful data, which leads to lower auto insurance premiums.

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