Usage-Based Insurance (UBI)

What is Usage-Based Insurance?

Usage-based insurance (UBI) is a motor insurance model that replaces or supplements traditional demographic rating factors with actual, observed data about how, when, and how much a vehicle is driven. Rather than pricing a policy based primarily on the driver's age, postcode, vehicle type, and claims history — all of which are proxies for the true underlying risk — UBI uses data collected via telematics technology to price the risk based on the specific driver's actual behaviour. Drivers who demonstrate low-risk behaviour receive lower premiums; those who exhibit high-risk behaviour pay more, regardless of their demographic profile.

UBI has grown substantially since its commercial introduction in the early 2000s. It is now standard for young driver policies in the UK, where the combination of high young driver accident rates and the cost savings available from telematics-verified safe driving has made UBI attractive to both insurers (who can more accurately price the risk) and young policyholders (who can earn premium discounts through demonstrably safe behaviour).

UBI Variants: PAYD, PHYD, and MHYD

UBI encompasses several distinct product variants. Pay-As-You-Drive (PAYD) charges premiums based primarily on mileage — the less you drive, the less you pay — with little or no behavioural scoring. This model appeals to low-mileage drivers (particularly those who work from home or use vehicles infrequently) who are overcharged by traditional mileage-averaged pricing. Pay-How-You-Drive (PHYD) incorporates driving behaviour scoring alongside or instead of mileage, adjusting premiums based on the quality of driving — speed compliance, smoothness of acceleration and braking, and time-of-day driving patterns.

Manage-How-You-Drive (MHYD) goes further, providing drivers with real-time or regular feedback on their driving behaviour through a smartphone app or online portal, enabling them to modify their behaviour and improve their score over time. This feedback loop is a key differentiator for some UBI products and has been shown to deliver genuine safety improvements — not merely a pricing adjustment but a behavioural intervention. Some programmes give young drivers monthly premium adjustments based on their score; others recalculate the premium at renewal based on the full year's telematics data.

Actuarial Considerations for UBI Pricing

Building a robust UBI rating model requires large volumes of telematics data linked to actual claims outcomes. The actuary must identify which driving behaviours are genuine predictors of claims frequency and severity — after controlling for confounding variables such as geographic exposure and vehicle type — and weight them appropriately in the rating algorithm. This requires significant investment in data science and model validation, and the model must be updated regularly as new data accumulates and driving patterns evolve (for example, the impact of semi-autonomous vehicle features on crash rates).

UBI and Claims: The Telematics Evidence Advantage

UBI products create a claims data advantage that extends beyond pricing. When a policyholder makes a claim, the telematics record for the vehicle provides objective evidence of driving behaviour on and around the date of loss — speed, location, time, and the dynamic behaviour of the vehicle in the moments immediately before and after a collision. This data can confirm or challenge the insured's account, provide subrogation evidence against at-fault third parties, and detect fraudulent or staged accident claims. Insurers with mature UBI books report measurable reductions in claims fraud rates and faster resolution of liability disputes as a result of telematics evidence availability.