What is Usage-Based Car Insurance and How Will it Affect Me?

Have you heard of Usage-Based Car Insurance? It may not sound familiar to you, but if you’ve seen Progressive’s commercials for their “Snapshot” insurance, or State Farm’s Drive Safe & Save program, then Usage-Based Insurance has already been pitched to you. You may have also heard it referred to as “Pay As You Drive” or “Pay How You Drive” insurance.

What is Usage-Based Car Insurance?

Usage-based car Insurance is a fairly new technology that allows insurance companies to track their customers’ driving habits. The idea behind usage-based car insurance is similar to many other “safe driver” discounts: if a driver has extra safe driving habits, then they typically are at a lower risk of causing an accident. Because of this lower risk (which saves the insurance provider money), they give these safe drivers a discount on their car insurance.

With traditional safe driver discounts, the insurance company takes a look at your driving history and gives you discounts based on that. With the usage-based model, instead of just looking at your driving history, they look at your actual current driving habits. There are specific technologies that they use (usually called telematics) that pull data from your vehicle. This information that they collect about your driving habits helps them to analyze your patterns and risk.

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What Information Do They Collect?

There are a few different models in usage-based car insurance. With a couple of the more simple models, they just track how much you drive (using your odometer reading or the number of minutes your vehicle is used). This is also referred to as a “Pay As You Go” policy (just tracking the amount of driving you are doing).

More commonly, though, the insurance providers are tracking a few more things. These type of policies are the “Pay How You Drive” policies. These policies are tracking not just how much you drive, but HOW you drive. The most common things they track are:

  • Distance Traveled (mileage). Theory: the more time you spend on the road the more chances you have to get in an accident.
  • Speed. Theory: the faster you go, the less time you have to react to unexpected changes in the road.
  • Driving Behavior. Theory: if you’re constantly slamming on your brakes it may mean that you’re driving too close to other vehicles or accelerating more than you should be, etc.
  • Time of Day On The Road. Theory: if you drive during the hours of the day that have more traffic (aka rush hour) or higher instances of accidents, then you are more likely to get in an accident. You may be surprised to learn that late at night is actually the most risky time to drive, even though there aren’t typically a lot of drivers on the road. This is because of the frequency and severity of accidents that happen during that time (think about drowsy and drunk drivers).

A few of the less common things that some programs also track are: driving too long without a break, where you are driving, the type of vehicle used, if you use your cell phone while driving, etc.

How Does It Work?

So how exactly do the usage-based car insurance programs work? Well, it obviously depends on which program you are working with but there are a few different ways that they collect your data.

  • Some programs (like Progressive) send you a device that you plug into your car’s diagnostic port. You then either plug the device into your computer to transmit the data to your insurance provider, or you send the device back to your provider for them to analyze the data.
  • Some programs connect to your OnStar account to collect the needed data.
  • Some programs have their drivers sync their smartphones to their cars via Bluetooth, and use their phone’s internet connection to transmit the data.

Once the insurance company is able to track and analyze your driving habits, they can determine whether you are considered a “safe driver.” If you pass the test, then you receive discounts on your car insurance premiums.

Marketed Benefits:

Those who are pushing for the growth of usage-based car insurance say that this model can affect us all in a good way. Some of the benefits that they are claiming are:

  • Savings to Insurance Providers. The companies that manufacture these telematics devices explain to the insurance companies that these programs allow them to have more accuracy when assessing the potential risk of each driver. This higher accuracy should be able to save the insurance providers a lot of money in claim payouts. (And as they save this money, hopefully they will pass on some of these savings to their customers).
  • Savings to Drivers. The insurance companies that provide this type of insurance offer savings and discounts to drivers who they find to have safe driving habits. For some, this could even mean significant savings. DriveFactor, a telematics technology company, claims that policyholders could save up to 50% off their car insurance.
  • More Choices. Some drivers (especially those who consider themselves good drivers) may really like this usage-based model. As more providers offer this type of coverage, that increases each individual’s choices when it comes to car insurance.
  • Increased Safety. It is also said that this type of data collection and analysis can actually improve driver behavior. Safer drivers are rewarded for their safe driving, so they keep these practices. And the hope is that higher-risk drivers will improve their driving habits as they seek to attain these same discounts for themselves. If that is true, this could help to make the roads a safer environment for us all.
  • Tracking to Recover Stolen Vehicles. Many of these telematic devices have GPS technology built in. This GPS technology could prove beneficial in instances of car theft by tracing the location of the car. It could also potentially be used by emergency responders to locate you in case of an accident or breakdown.

Potential Drawbacks

“What if I don’t want to use this program?” “Does it infringe on my privacy?” “Will it make my rates go up if they don’t think I’m a good driver?”┬áThese are common questions/concerns that come up in the discussion about usage-based insurance. Here is what I know in answer to these questions:

  • As of right now, all of the usage-based programs are completely optional. They are something that you choose to opt-in to. I can’t say anything for what will happen in the future, but as of right now these programs are only on a voluntary basis.
  • Some systems do use GPS tracking technology. Many think this is a good thing (again, it could be found useful in the case of theft, accident, or breakdown). But some people believe this infringes on their privacy. But again, currently this is all voluntary, so you must agree to release your data before they can start collecting any of this information about you.
  • The companies that are currently providing usage-based car insurance say that they will only use this information to make your rates go down, never up. Again, I can’t predict how that will change in the future, but as of right now it is only being used to reward safe drivers, not to penalize “unsafe” drivers.

Who Offers Usage-Based Car Insurance?

Most companies nowadays offer some sort of usage-based car insurance options. It’s worth a quick phone call to your current insurance provider to see if they have a program to offer you. If they don’t have any usage-based offerings, companies like Progressive, Liberty Mutual, and State Farm all currently offer usage-based insurance options.

Nicole covers the cheap car insurance section of the blog on CheapInsurance.com.

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