Understand why usage based insurance is growing
In recent years, the auto insurance sector has undergone significant transformations, and one of the most promising trends is Usage-Based Insurance (UBI). This model, which evaluates the actual behavior of the driver to calculate the premium, has been gaining ground and revolutionizing the way we think about insurance.
But what’s behind this rapid growth? Below, we explore the main reasons why UBI is becoming increasingly popular among consumers and insurers.
What is Usage Based Insurance?
UBI is a type of insurance that uses technologies such as telematics, GPS, and vehicle sensors to collect data about driver behavior.
This includes information like distance traveled, average speed, time of vehicle use, sudden braking, rapid acceleration, and more.
Based on this data, insurers can calculate risk in a personalized way and offer fairer, more competitive prices.
There are different formats of UBI, such as:
- Pay-As-You-Drive (PAYD): the customer pays according to mileage;
- Pay-How-You-Drive (PHYD): considers driving style;
- Manage-How-You-Drive (MHYD): offers real-time feedback to encourage safer driving.
Why is UBI on the rise?
1. Greater perception of fairness in insurance pricing
Traditionally, insurance premiums were calculated based on general statistical data, such as age, gender, and place of residence.
This means that even a good driver could end up paying a high premium just for being part of a “high-risk” group. With UBI, the insurance value is based on actual driving behavior, making the model fairer in the eyes of consumers.
2. Technological advancements
The popularization of connected vehicles, smartphones with advanced sensors, and IoT devices has enabled real-time data collection and analysis with greater accuracy and at lower costs.
These tools have made UBI feasible and accessible, paving the way for its market expansion.
3. Changing consumer profiles
The new generation of drivers values transparency, personalization, and financial control. UBI offers all of that: it allows the driver to monitor their driving score, understand what influences their insurance cost, and make decisions to pay less.
This aligns perfectly with today’s more conscious and digital consumer behavior.
4. Incentive for safer driving
Many UBI programs offer rewards or progressive discounts for drivers who drive responsibly.
This creates a virtuous cycle: the safer the driving, the lower the insurance cost, which encourages good habits on the road. The result is a reduction in accidents and lower costs for insurers, benefiting both parties.
5. Flexibility in uncertain times
During the pandemic, mileage dropped significantly, but many consumers continued paying the same insurance rates.
This situation exposed the rigidity of traditional models and boosted interest in more flexible solutions like UBI, which follows the actual vehicle usage.
Impact on the insurance market
The trend is that UBI will become even more relevant in the coming years. Major insurers are investing heavily in telemetry and data analysis to enhance their pricing models.
Insurtech startups are also entering the market with 100% digital solutions, making the industry more competitive and innovative.
Studies indicate that in the United States, over 20% of consumers have already adopted or are considering switching to usage-based insurance. In Europe and Latin America, growth is also steady, especially among young urban drivers.
Challenges and considerations
Despite the benefits, UBI still faces some challenges. Data privacy is a recurring concern, many consumers want to know how their information is used and protected.
It’s also essential to ensure that scoring algorithms are transparent and do not replicate biases.
Another issue is the need for consumer education. Many drivers are still unfamiliar with the model or unsure how it works. Therefore, insurers must invest in clear and accessible communication.
The boom in Usage-Based Insurance is a direct result of the combination of technology, changing consumer profiles, and the demand for greater fairness and efficiency in the insurance industry.
The usage-based model not only offers more accurate pricing but also promotes more conscious driving, helping to build safer roads for everyone.
As vehicle connectivity advances and data collection becomes more sophisticated, UBI is expected to become the new standard in the auto insurance industry, benefiting insurers, consumers, and society as a whole.