Usage based insurance is the latest concept in the auto insurance industry that has the potential to revolutionize the way we pay for and use our auto insurance. By creating a rating system that is personalized and dynamic, usage based insurance programs will allow people to see premiums that reflect where and how they use their vehicle. There are a number of ways in which usage based insurance programs can reduce a driver’s insurance costs.
What is Usage Based Insurance?
In order to understand how it could save you money, it’s important to get a grasp of what usage based insurance actually is. Usage based insurance is a voluntary program which uses information transmitted from your car to the insurance company to determine things like how often you drive, where you go, how many kilometers you drive in a month, and how safe your driving is based on measurements like hard braking, sharp turns, and speeding. This allows the insurance company to create an individualized premium for you based on the actual usage of your car rather than historical factors and estimates alone. Because the information is transmitted regularly, the premiums can remain in line with your current usage as it changes over time.
How Accuracy Saves Money
Usage based insurance methods allow the insurance company to get a clear picture of your exact usage. They can tell how many kilometers you drive each month, instead of you making a guess. This means that they can charge you based on how far or how frequently you actually drive rather than a guess or a historically based number that may change over time. This can actually mean you pay less over time, since you would pay a smaller bill on a month when you drive very little. On the reverse, you may pay more on a month when you drive more, however over time it’s likely to even out and result in more savings that with a rating plan that simply chooses a flat number. Accuracy means that you don’t pay based on an estimated distance number that may not apply. Distance-based and Pay-as-you-drive (PAYD) systems both work with these principles.
How Tracking Driving Habits Saves Money
Being able to track how you drive allows your insurance company to determine whether or not you are a good, safe driver – and good drivers get discounts. Pay-how-you-drive (PHYD) systems keep track of some of the signs of bad driving habits that are likely to lead to accidents. How often you brake hard, how sharply your take corners, and how often you speed are all factors that play into the likelihood that you will have an accident. If the information transmitted about your driving habits indicates that you are a good driver, you can qualify for discounts on your auto insurance premiums. This provides current information about your driving habits, rather than basing it on historical or statistical information.
Fraud, Claims, and Insurance Costs
Auto insurance fraud is a big problem, and costs insurance companies a lot of money. The systems used to track information about how a car is driven can help to prevent insurance fraud by allowing adjusters to look at the facts of an accident including where the car was, how fast it was going, and how hard the brakes were hit before impact. By allowing insurance companies to get more information about an accident, we allow them to catch potentially fraudulent claims. When insurance companies waste less money on fraudulent claims, they can pass the savings on to customers. It could also allow them to process claims and determine fault more accurately, which means that some of the ambiguity in and accident can be removed, helping to create a clear picture of what happened. Smooth claims processing also reduces insurance company costs, and accurate fault determination ensures you don’t see an increased rate as a result of an accident that wasn’t your fault.
The Overall Impact
Usage based insurance is still relatively new, so it’s not entirely clear yet what the overall impact will be on insurance rates. There is some very clear evidence that it is likely to create a reduction in rates for those who choose to use it, and may also reduce rates across the board in the future. Usage based insurance can be costly to implement, so overall reductions may take some time to take effect.
