The Rise of Usage-Based Automotive Insurance

With inflation increasing daily and causing essential bills to increase in price. Consumers are looking for various ways of reducing their monthly bills and outgoings. One way that has been rising in popularity is usage-based automotive insurance.

What is Usage-Based Automotive Insurance?

The basic premise of usage-based automatic insurance is that you pay based on the usage of your vehicle. So for drivers that use their cars sporadically or for short trips, this type of insurance is perfect. Traditionally, automotive insurance is based on several factors, including age, gender and driving history. The customers are then charged a flat yearly or monthly fee, regardless of how much the car is actually used. 

The expansion of usage-based automotive insurance is partly due to the COVID-19 pandemic. Drivers were simply not using their cars as much. Due to this dip in use, many drivers opted for a more customized policy to get the most out of their insurance.

With these types of policies, insurance companies can offer discounts to safe drivers and handle any risks more accurately, something that traditionally would not be possible. In five years, this sector of automotive insurance has increased from 21 million to 29 million, and it is set to just keep increasing.

What types of Usage-Based Automotive Policies are Available?

Usage-based automotive policies can be implemented in a number of ways. The most popular procedures include implementing a telematics device, using an app on your smartphone or opting for a pay-as-you-drive policy. 

Implementing a telematics device or using a smartphone app gives insurance companies a detailed picture of how the customer drives on a daily basis. They can then offer a more customized policy to that driver. Usually, if the customer is considered a safe driver, this results in a discount. 

In the future, companies expect smartphones to be the go-to technology for this type of insurance policy. 

Many automotive insurance companies offer their customers a mileage-based policy in which they only pay for what they drive. Since the COVID-19 pandemic, many people are now working from home or in a hybrid setting which means policies like this could still benefit them.

Also, with the economy being so volatile and fuel prices remaining high, many drivers have decided to opt for a usage-based policy in the hope that they would reduce their monthly or yearly outgoings. These policies are expected to become the dominant choice for automotive consumers over traditional automotive insurance policies.

The Growing Usage-Based Insurance Market

From 2022 to 2031, the usage-based insurance market is set to expand by 12.54%, and its global market is expected to reach over $77 billion in value. This market is expected to grow due to the addition of convenient smartphone apps and the range of different policies available, including pay-as-you-drive. Consumers enjoy being in control of their financial landscape, and policies like these give them that chance. 

The current volatile economy is also driving the usage-based insurance market as both insurance companies and consumers look to reduce their outgoings. Their insurance premiums are usually 20-30% cheaper than traditional policies, and if there are multiple vehicles in one household, that is a lot of money saved every year.

The Global Increase of Usage-Based Automotive Insurance

As usage-based insurance expands throughout the five continents, the actual policies can still vary considerably. Globally, usage-based insurance policies have increased quickly in Europe, with the United Kingdom and Italy at the forefront. Overall, Europe has over eight million active usage-based automobile insurance policies.

These insurance policies have helped to reduce automotive theft and fraud in Italy. Usage-based automotive insurance has really helped out young drivers in the United Kingdom, as insurance premiums are incredibly high. But by using a usage-based system, insurers have a record of how responsible the young driver is. This, in turn, will get them a lower premium. Smartphone usage-based insurance is expected to increase by 28% by 2030 and will account for 50% of the market. 

This can also be said for the Asia-pacific market as they have 2.5 billion customers with usage-based automotive insurance policies. This market is expected to become the leading global market by 2030 as usage-based insurance was just approved in July 2022. And there has been a high amount of interest in the alternative insurance policy so far. 

Usage-based automobile insurance has also increased in popularity in South America and South Africa.

The Challenges of Usage-Based Automotive Insurance

While there is a high adaptation of usage-based automotive insurance globally, it is still in its early stage of development. There are still several challenges insurance companies will face as consumers change from traditional car insurance to a more intensive way of insuring their vehicles. 

It may be difficult for drivers to change their driving habits in order to receive the lowest premium. This is especially the case if they have been driving for a number of years. 

Insurance companies will have to combat consumer concerns over privacy issues. Granted that they will have accrued a high amount of information during the implementation of their smartphone app or telematics device. They have to ensure complete transparency when it comes to their data-sharing policy. Also, companies will need adequate cybersecurity to protect their customer’s data.  

Lastly, they will need to manage their customers and the level of expectations they might have when changing to a usage-based automotive insurance policy. As these insurance policies grow, insurance companies will need to differentiate themselves. The easiest way to do that is by offering a range of discounts. But these discounts will be challenging to implement as every driver is different.