Usage-based insurance rises in popularity as an auto coverage option

The interior of a Ford Mustang Mach-E GT compact sports utility vehicle (SUV) during the 2022 New York International Auto Show (NYIAS) in New York, U.S., on Thursday, April 14, 2022. The NYIAS returns after being cancelled for two years due to the Covid-19 pandemic.

Michael Nagle/Bloomberg

The cost to repair a vehicle had risen approximately 20% year-over-year according to the consumer price index in June.  The increased use of technology in vehicles, coupled with more severe crashes due to higher rates of speed, supply chain issues and fewer service technicians, have dramatically affected repair costs. Even replacement parts for non-accident-related repairs have risen. Consider that a transmission that used to cost $2500-$3000 had more than doubled to $7,000 in late 2023, and one can understand why these factors have a direct impact on the cost of auto insurance premiums.

A June customer satisfaction report from J.D. Power found that nearly 31% of auto policyholders saw rate increases averaging over 15% in the past year. According to Bankrate, the average cost for full-coverage auto insurance is approximately $2014 annually. Since auto insurance is mandatory coverage in most states, policyholders are looking for other coverage options to help them keep their insurance affordable without having to take on a second job. The rise in the use of insurtech is providing carriers with opportunities to create new products that can personalize coverage and pricing, making it more affordable for careful drivers.

Usage-based insurance (UBI) is one such option. It enables carriers to provide coverage based on several factors unique to a driver, such as the miles driven per week, type of driving (city vs. highway), their tendency to speed (or not), and other factors. Technology can be added to a vehicle or even a mobile device to monitor driving habits and speeds. Does a driver constantly hit the brakes hard because of excessive speed or tailgating? Does she drive at constant speeds or consistently speed up and then slow down? Does he use his cell phone for texting or talking while driving? All of these factors affect the personalized pricing for a driver. 

Pay-as-you-go insurance is generally based on the total miles driven by a driver over a specific period of time. During the pandemic, when many workers weren’t going into the office, they reached out to their carriers and thought they should receive lower rates for traveling shorter distances, and pay-as-you-go became a popular alternative.

Pros & cons of usage-based insurance

Several large insurance companies offer usage-based insurance including: State Farm, Nationwide, Liberty Mutual, Geico and Progressive. According to ValuePenguin, the cost savings for switching from a traditional auto policy to a usage-based option can range from 10-40% depending on several factors. 

State Farm’s Drive Safe & Save program personalizes coverage for policyholders based on the number of miles driven and their driving habits. “Drive Safe & Save is our response to customer demand and enrollment is completely voluntary,” explains Dave Phillips, senior public affairs specialist for State Farm’s Eastern Market Area. “It provides our customers the power to personalize their auto premium based on the number of miles driven and how safely they drive. It uses telematics technology to measure an individual’s driving characteristics and the discount is based on how a customer drives. This may include things like annual mileage, fast acceleration, hard braking and cornering.”

Phillips adds that the program is the company’s largest discount opportunity for customers. “The average discount is between 10 and 15%, with even higher discounts possible depending on actual mileage driven and individual driving behaviors. The discount can be up to 30% or even higher for some customers, with the maximum available discount at 50%.”

In addition to the discounts, drivers who use the State Farm app will receive feedback to help them become even safer drivers. 

For drivers who are more aggressive or like to talk and text while they drive, usage-based insurance may not be the best option. Technology tracks a driver’s location, speed, distance covered and whether or not they use a cell phone while driving. As risk factors, they can affect what a driver pays for insurance. 

There are also pros and cons for carriers who decide to offer this type of coverage. “In a market where rate adequacy is paramount for insurers to stay in business and customers are getting hit hard by premium increases, UBI is a very attractive option for drivers looking to save some money,” shares Breanne Armstrong, director, insurance intelligence at J.D. Power, “but the rise of UBI is a little bit of a mixed bag for some insurance companies. On the positive side, it can increase customer engagement, loyalty, advocacy, and satisfaction, attract lower risk drivers, and even fairly small cost savings (5% or less) has a big impact on a customer’s satisfaction with the UBI program and a positive impact on the perception of the discounts they are getting.”

However, Armstrong says that some policyholders are choosing to unbundle their home and auto coverage if their carrier doesn’t offer UBI, which could cause some insurers to lose business. 

“Carriers need to closely evaluate their UBI offerings to ensure they stay competitive, because on the flip side, if customers don’t think the UBI info being collected is accurate or don’t completely understand the information being collected, it can have a negative impact on satisfaction,” adds Armstrong. “UBI can help customers feel more in control of the cost of their insurance, especially in an environment where we don’t always have control over what we pay for a service.”