There are many different terms to describe the concept whereby car insurance premiums are calculated based on the degree to which the vehicle is used. “Usage based” does not refer to the use of your car insurance – but the use of your insured vehicle!
I would like to refer briefly to the description found at Wikipedia:
“Usage based insurance, also known as pay as you drive (or PAYD) is a type of automobile insurance whereby the costs of motor insurance are dependent upon type of vehicle used, measured against Time, Distance and Place.
This differs from traditional insurance, which attempts to differentiate and reward “safe” drivers, giving them lower premiums and/or a no-claims bonus.”
Why is this deemed a fair way of calculating premiums?
In an environment of fast increasing car insurance premiums there is little that the consumer/ vehicle owner can do to reduce these premiums. Many of these increases are caused by rising vehicle and component costs, whilst insurance fraud and the high rate of road accidents are also making a significant contribution.
Vehicle owners might, with reason, feel disgruntled if they are challenged with increasing car insurance premium while they themselves are maintaining an accident free record and are travelling less. They will search for insurance products that better reflect their specific risk to accidents and vehicle loss instead of subsidizing the reckless and unnecessary travels of others. This is where usage based insurance is finding a strong foothold and is fast increasing in popularity!
The basics of usage based car insurance
We would like to quote briefly a nice summary on Wikipedia about the types of usage based car insurance:
The simplest form of usage based insurance bases the insurance costs simply on the number of miles driven. However, the general concept of Pay As You Drive includes any scheme where the insurance costs may depend not just on how much you drive but how, where and when you drive.
Pay as you drive (PAYD) means that the insurance premium is calculated dynamically, typically according to the amount you drive.
3 Types of usage based insurance
1. Coverage is based on the odometer reading of the vehicle.
2. Coverage is based on the number of minutes the vehicle is being used as recorded by a vehicle-independent module transmitting data via cellphone or RF technology.
3. Coverage is based on other data collected from the vehicle, including speed and time-of-day information in addition to distance or time travelled. Other data could include where you are driving and driving behaviour such as speeding, excessive braking etc.
The formula can be a simple function of the number of miles you drive, or can vary according to the type of driving or the identity of the driver. Once the basic scheme is in place, it is possible to add further details, such as an extra risk premium if someone drives too long without a break, uses their mobile phone while driving, or travels at an excessive speed.
What is Telematic usage based insurance?
Telematics is defined as the technology of sending, receiving and storing information via telecommunication devices in conjunction with effecting control on remote objects.
Telematic usage based insurance requires that vehicle information is automatically transmitted to the tracking system. This provides a much more immediate feedback loop to the driver, by changing the cost of insurance dynamically with a change of risk, and this means drivers have a stronger incentive to adopt safer practices. For example if a commuter switches to public transport or working at home, this immediately reduces the risk of rush-hour accidents. With usage based insurance, this reduction would be immediately reflected in the cost of car insurance for that month.
With the use of technology gaining increased popularity in the fair calculation of insurance risks and premiums, it is to be expected that many more insurers will focus on “usage” in their product design.
We will discuss on this blog how this might not only benefit the pocket of our vehicle owners – but also the impact that our travel patterns have on the environment!