Usage based auto insurance is a relatively new idea, but one that could be beneficial to both customers and insurance companies. In general, usage based insurance involves using a tracking device to record the number of miles driven and certain driving habits of insured drivers. This information is then used by an insurance company to determine the premium rates charged to each individual customer.
Currently, auto insurance premiums are determined by several factors that typically include the age and sex of the driver, the driver’s history, and the driver-reported number of miles driven each year. By combining this information with the make and model information of the car, an insurance company can assign a premium amount to each customer. This model does not take into account the differences between the customers in each of these groups, however. For example, every twenty-two year old males with one speeding ticket will be charged the same premium amount by an auto insurance company under the present system. How often these people drive or whether or not they frequently follow traffic rules is not taken into account.
Under usage based auto insurance, however, an insurance company can track how often these drivers are actually behind the wheel of a car, as well as how well each of these drivers performs while driving their car. Under the old system, a college student who only drove his car in residential neighborhoods when home during breaks would pay the same amount as someone who drove his car everyday on major highways to go to work. Since the student’s likelihood of being in a serious accident is far less than the non-student’s but both men are paying the same amount for their insurance, it can be assumed that the student is probably paying more than his fair share for his insurance.
Usage based auto insurance is about making the insurance market fairer. A small device is placed in a person’s car that records the total amount of miles driven. In some cases, it can also record information such as the speed driven or the frequency of sudden stops. While these devices are not yet sophisticated enough to record whether drivers routinely go over the speed limit, it can flag people who drive at high speeds or slam their brakes frequently. An insurance company can take this information and base their premium prices on rewarding certain good behaviors.
The main component of pay as you go or usage based auto insurance is that people are able to pay only for the car insurance they need. Usage based auto insurance means that customers’ premiums are based on the total number of miles they drive. Persons who drive their car infrequently and/or go for long periods of time between driving their car could stand to save a lot of money off of their premiums.
In addition, consumers will be given more choice regarding the amount they pay for auto insurance. A customer can choose to drive his or her car less if he or she needs to save money in a particular month. If a person is unable to drive their car less, however, they can continue to pay their same amount for auto insurance. Usage based auto insurance allows a consumer to pay a flat rate for auto insurance, but they can receive discounts for driving well or driving less.
The advantages to consumers are certainly worth the minor inconveniences caused by the devices used to track a driver’s driving habits. In fact, these devices are usually just plugged into a car and forgotten about by the insured drivers. In exchange, drivers can become eligible for significant discounts.