Usage-Based Insurance ("UBI") is a recent development by auto insurers that attempts to more closely measure driving behaviors in order to develop more accurate premiums for auto insurance. By using UBI programs, insurers hope to gain a competitive advantage and attract lower-risk drivers.
Under UBI programs, actual miles driven are tracked by odometer readings or an in-vehicle telecommunication device (telematics) that is installed in the vehicle. In addition to miles driven, these devices can measure a number of driving factors: where the car is driven; time of day; and driving characteristics such as hard braking, fast cornering, and rapid acceleration. The insurance company then assesses the data and prices accordingly. For example, a driver who drives more, faster, more aggressively, and during commute times will pay more than a driver who drives less, more slowly, less aggressively, and during non-commute times. These programs have been developed under such names as Pay As You Go, Pay Drive, and Pay How You Drive.
There are regulatory challenges to implementing such auto insurance programs. The use of such devices and collecting driver data has raised privacy concerns by state legislators, insurance regulators, and consumer groups. Consequently, there is a wide variety among individual states as to how and to what extent UBI programs and the use of telematics may be implemented. Most states will allow the use of UBI programs to measure at least mileage driven, but states differ as to the collection and use of other data that can be collected from telematic devices. For example, California allows the collection of actual mileage data by the use of a voluntarily installed telematic device, but no other data can be collected or used to price auto insurance.
It appears that UBI programs and telematics are here to stay in the auto insurance world, and their use will only grow in the future. It is likely that most, if not all, insurers will avail themselves of this technology in any state which they can. Insurers will have to navigate not only the various states' laws relating to telematics usage, privacy, and rating, but will also have to ensure that their pricing based on the various measured usage factors is actuarially sound and does not lead to unprofitable rates. In addition, the regulatory landscape will evolve as the states continue to look at and likely change the laws relating to the use of UBI programs and telematics.
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