Paying for car insurance based on your driving habits
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Usage-based insurance (UBI) determines your insurance premiums based on your driving behavior. This is also known as pay-as-you-drive and distance based insurance.
Traditional auto insurance uses an actuarial (statistical) analysis based on your driving record, credit-based insurance scores, personal characteristics (age, gender, marital status), vehicle type, garage location and other factors to determine your insurance premium.
UBI programs add your individual driving behavior as another factor in setting your rates. UBI operates by collecting information from wireless devices installed in your car. The data is transmitted in real time to the insurance company and includes miles driven, time of day, where the vehicle is driven, rapid acceleration, hard braking, hard cornering and airbag deployment. Some of this information can also be tracked through your smartphone.
The insurer then uses your individual, current driving behavior — rather than statistics based on past trends and events — to set your premium rates.
Since 2008, every new vehicle sold in the United States comes equipped with an event data recorder. The National Association of Insurance Commissioners estimates that by the end of 2020, 70 percent of all auto insurers will use some form of device in your car to monitor your driving behavior.
The advantage of purchasing insurance based on a UBI rating is that if you are a low-risk driver, it can lower premiums. But if your driving patterns don’t fit the insurance company’s model to identify safe driving habits, your premiums may go up even if you’ve
never had a wreck. Driving habits vary, and you may not be eligible for a discounted rate if you are not rated as a better-than-average driver.
The technology for monitoring driving patterns is still new, and it is not clear how insurers will use the data they collect. It raises privacy concerns when insurers are allowed to track your mileage, your location and your driving habits.
What to consider: Do you trust your insurer with your information? Do you think your driving behavior will help reduce your premiums? If not, are you willing to alter your driving behavior for a discount?
What are the potential savings if you let your insurer monitor your driving? What exactly will be monitored? What devices will be used? Will your insurer allow you to decide whether information from a monitoring device will be used after an accident to settle a claim?
You can get more information about UBI, by contacting your state insurance department.