Usage-Based Insurance - How it Works and What are the Benefits

Posted on: May 24, 2022 | | Written by:

Usage-Based Insurance - How it Works and What are the Benefits

Technology has completely changed the way people used to purchase insurance. With advanced systems being incorporated into insurance products, insurance is more personalized now. Flat rate insurance doesn’t suit all and thus arises the need for more personalized insurance offerings.

Further, pandemic and virtual modes of conducting business have reduced the need to travel every day to work. When people are not using their vehicles, they do not want to pay for insurance also. This is why Usage-Based Insurance is gaining momentum and is being adopted by insurers. It allows car owners to pay car insurance premiums depending on how much they use their cars. Wondering how? Here is everything you need to know about Usage-Based Insurance.

What is Usage-Based Insurance (UBI)?

Usage-based insurance calculates your insurance premium depending on your driving rather than a fixed amount like conventional car insurance. Distance travelled and your driving behaviour is two important factors that decide your car insurance premium. The insurer uses data such as driving speed, acceleration rate, braking pattern, and whether you use the phone while driving, to calculate insurance premium. Such insurance rewards good driving behaviour and lets you save on premiums if you don’t drive your car often.

How does UBI work?

UBI uses a telematics device, installed in the car, to track how the car is driven. Telematics uses telecommunication and informatics to track and share driving data. It uses advanced analytics to record driving information like speed, braking, acceleration, and frequency of usage. The insurance company uses this information to analyze driving behaviour and determines the risk profile of the driver which helps in calculating the premium. A safe driver pays a lower premium compared to a rash driver.

The car insurance company tracks your driving, collects driving data, and prepares reports to determine your profile using any of the following ways;

1. Telematics Device -

This device is provided by the insurance company that you need to install in your car. It records all the driving information and tracks your driving behaviour. This device can be installed professionally and is most reliable. It provides accurate data. Nowadays there are built-in telematics devices in cars.

2. On-Board Diagnostics (OBD) Sensors -

These are sensors that you can self-install to the OBD port in your car. These sensors can store and share real-time driving data.

3. Plug-In Device -

It is also a self-install device like a pen drive that you can easily plug into your car.

4. GPS Device -

Advanced GPS device is also used to track and share driving information.

5. Mobile App -

No external device or installation is required. With the help of a mobile app, the car driver’s smartphone can be used as a telemetric device. The app tracks and shares the car’s movement. However, this option is not as reliable as others as far as claims are concerned.

Types of UBI

There are various types of usage-based insurance, where the premium is calculated depending on different parameters that you opt for.

● Pay As You Drive -

In this type, the premium is calculated based on the distance driven. There are slabs of distance which you can choose as per your usage.

● Pay How You Drive-

In Pay as you drive car insurance, the premium is calculated based on your driving patterns such as speed, acceleration, and braking pattern.

● Pay As You Go -

This type is a combination of the above two types. It is like a subscription where you are charged as per the distance or time. It is taken for a fixed period and is ideal in case you are borrowing or renting a car.

Who Should Go For UBI?

As the name says it is usage-based, depending on your usage you can decide if you need it. Here are a few examples of who should go for usage-based insurance.

● If you are a retired person, who does not drive often, you do not need to pay hefty premiums of a conventional insurance scheme.

● You have a good track record of driving so you can use it to fetch discounts.

● You travel a lot and you rent a car and require insurance for a short period.

● If you are a student or someone learning to drive you can opt for UBI and it will help you save on premium.

● UBI is the best option for fleet management companies.

Benefits of Usage-Based Insurance

1. Rewards for Safe Driving -

If you have a good driving record you can get rewarded for your driving behaviour and can get a customized premium rate.

2. Encourages Better Driving Habits -

The data recorded while driving gives important insights into your driving behaviour and can help you improve your driving skills and work on your mistakes.

3. Investigation of an Accident -

The telematics data can help in finding out the reason behind an accident and can help reduce accidents in the future.

4. Stolen Vehicle Recovery -

It can help in the recovery of a stolen vehicle with help of location tracking.

5. Reduces Claim Fraud -

It helps insurers trace fraud claims using telematics data.

6. Improves Customer Loyalty -

Customized premium rates and discounts translate into customer loyalty.

7. Easier Claim Management -

It makes it easier for insurance companies to manage claims as inspection and verification become a lot easier with tracking and recorded driving data.

Conclusion

In India, Usage-based insurance is slowly picking up with insurance regulators also focusing on its implementation. However, there are pricing and privacy concerns among users but insurers are working on it and soon there will be a win-win situation for both the insurance seeker and the insurance provider. To ensure safety on road, purchase good car insurance. You can now invest in usage-based insurance if you don’t drive often.

Disclaimer: The above information is for illustrative purpose only. For more details, please refer to policy wordings and prospectus before concluding the sales.

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