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Types of Usage-Based Insurance

November 29, 2013

Types of insurance

Usage-based insurance is a voluntary system that uses actual driver data in order to calculate premiums that are more individual and accurate than traditional methods, resulting in potential savings to customers. These systems have been in place in the U.S. and the U.K. for some time, and insurers have developed a few basic types of usage-based insurance using slightly different methods. The basic types of usage-based insurance rating include pay-as-you-drive, adjustments based on how you drive, or pay-how-you-drive, and distance based. Each of these uses slightly different information to determine your rates.

Pay-As-You-Drive Insurance

Pay-as-you-drive, or PAYD insurance is a system by which your rates are calculated on an ongoing basis, usually monthly, based on the information received on how much you drive. Thus, monthly changes in your driving patterns will be reflected on your bill; if you have done a lot of driving or driven long distances one month, you can expect a higher rate than if you do very little driving another month. Traditional insurance uses an average system for amount driven and can take a long time to reflect changes in your driving behaviour, whereas this type of usage-based system is dynamic and reflects changes in behaviour quickly.

Pay-How-You-Drive Insurance

A pay-how-you-drive (PHYD) system is a little more complex and uses more than just how far and how often you drive to determine rates. This system also takes into account measurable driving behaviours such as speeding, sharp braking, taking turns too quickly, and similar behaviours. This means that it is being used a measure of how good or safe a driver you are and rewarding you for sticking to safe behaviours on the road with discounted rates. On the flipside, the more dangerous behaviour the telematics records, the more expensive your rate might become. This system can’t record all potentially dangerous behaviours, but sticks to a few basic indicators of safe or reckless driving. This means that it’s not a perfect judge of driving behaviour, but for most safe drivers it can mean a reduction in rates.

Distance Based Insurance

The most simple of all of the usage-based systems, distance based insurance uses information from your odometer to get an accurate reading of how much you have driven. It doesn’t take into account where you drive, or whether your driving is on cities or highways. Your rates are increased or decreased based on the number of kilometers you drive on a regular basis.

Pay-As-You-Go Insurance

The term pay-as-you-go is another common one used in discussions of usage-based insurance. It generally refers to a PAYD or distance-based type of policy that calculates rates on an ongoing basis based on your driving habits. These policies usually rate based on kilometers driven, but may also use other indicators to determine rates. Pay-as-you-go policies are usually calculated monthly based on the information regarding your driving habits for that month.

Comparing The Options

In the future, insurance companies may offer one or more of these types of usage-based insurance systems to their customers, but most will likely have only one option. Each insurance company will determine what type of usage-based insurance they would like to offer to drivers, and you will have the option of selecting it or sticking with a traditional plan. Based on your driving habits, you can determine whether or not a usage-based insurance policy makes sense for you. Safe drivers may benefit greatly from a pay-as-you-drive system. Those who drive infrequently may do well on a pay-as-you drive, while those who drive only very short distances could benefit from a distance-based choice.

How The Options Are Implemented

Usage-based insurance is usually implemented in one of two ways – through either a GPS system or by use of a telematics device that is placed on the car. Pay-as-you-drive and distance-based plans may operate on a simple GPS system or through a cell phone application that relates the information regarding your driving distances and frequency to the insurance company. Plans requiring more complex information usually use a device that is placed on the car and reads data including speed, sharpness of braking and turns, distance, and more. This device transmits the information to your insurance company in order to determine rates.

Usage-Based Insurance in Combination With Traditional Insurance

Although usage-based insurance is one of the newest trends in insurance, traditional methods of rating will still remain a part of the equation. The information gathered through monitoring your car usage is only part of the total picture required to develop a fair and individual insurance rating system. It can make a big difference in your rates, however, and keep your premiums up to date based on your most current habits.