Auto insurance has come a long way from traditional fixed premium policies. With the advent of technology, insurers have developed innovative approaches to determine premiums and tailor insurance plans to individual driving habits. Two primary approaches have gained prominence: Usage-Based Insurance (UBI) and Behavior-Based Insurance (BBI). These terms are often used interchangeably but have grown to mean rather different things. Both UBI and BBI leverage telematics data and technology to assess risk more accurately and tailor coverage to the policyholder, but the way that the results are achieved varies between the two.  

In this blog, we will provide underwriting professionals with a comparison of UBI and BBI, highlighting their key differences and implications for the underwriting risk assessment process for both personal and commercial lines. 

Usage-Based Insurance 

The Essence of UBI

UBI, often referred to as telematics insurance, was the first of the two terms to enter the insurance underwriting landscape. UBI relies on telematics data collected from various connected sources, such as in-vehicle devices or mobile apps. This data includes information on miles driven as well as driving behavior such as acceleration, braking and location. Some professionals in the industry have adopted this as an umbrella term for the many programs built around telematics data.

While it may still be used more broadly, over time the term UBI has grown to more specifically refer to the number of miles that an insured travels in a defined period This approach is synonymous with pay-as-you-drive (PAYD) or mileage-based coverage, which tracks the frequency and duration of vehicle usage. Pay-permile insurance programs, such as Metromile, Nationwide’s SmartMiles and Allstate’s Milewise, allow policyholders to pay a base rate and a low price per mile driven. This model is ideal for people who drive less frequently or for shorter distances and has gained traction most notably in the personal lines auto market 

How Does UBI Work? 

Data Collection: The eligible connected device, vehicle or Smartphone App captures the usage from the policyholder’s vehicle or fleet of vehicles, including the mileage and time spent driving. 

Premium Calculation: Premiums are determined based on the collected usage data, with lower rates for less frequent driving. 

Key Benefits of UBI for Underwriting 

Precise Pricing: Telematics data provides more accurate usage data, allowing insurers to deliver fair and differentiated pricing to those who travel less frequently. 

Lower Claims Frequency: There is a correlation between collision frequency and vehicle miles traveled. By offering incentivizing programs that reward policyholders for driving less, insurers can attract safer drivers.  

Environmentally Friendly: The mileage-based programs encourage reduced vehicle usage, which also contributes to lower carbon emissions.  

Behavior-Based Insurance (BBI) 

Understanding BBI 

BBI focuses on the driver’s behavior behind the wheel. Similar to UBI, insurers collect data through a connected device in the vehicle or an app. Telematics data provides underwriters with granular insights into a policyholder’s driving habits and risk exposure. The data collected is used to assess risk, calculate premiums and includes information on miles driven as well as driving behavior such as speeding, acceleration, hard braking and location.  

BBI introduces a more comprehensive approach to risk assessment and mitigation, earning the acronym PHYD, or Pay How You Drive. This data can help underwriters assess risk more accurately, leading to more refined pricing models and reduced claims costs. Instead of solely relying on historical driving or claims patterns to assess risk, they can access a broader range of data points, allowing for a more holistic evaluation of a policyholder’s risk profile. This can be especially relevant for commercial insurers wanting to more accurately assess a fleet of drivers. Insurers can use this data to identify high-risk behaviors in between renewal periods and deliver targeted training to mitigate risk. In the traditional BBI model, insurers often reward positive driving behavior and provide additional support to improve riskier driving trends.  

How Does BBI Work? 

Data Collection: The eligible connected device, vehicle or smartphone app captures and transmits critical driving information, like distance, time of day and driving behavior (distracted driving, speeding, harsh braking).   

Premium Calculation: Insurers analyze this data to determine the driver’s risk profile.  

Premium Adjustment: Premiums are adjusted based on the driver’s behavior. Some programs reward safe driving with lower rates or provide tools to reverse riskier trends.  

Key Benefits of BBI for Underwriting

Comprehensive Risk Assessment: BBI provides underwriters with a more complete view of a policyholder’s risk profile, factoring in high-risk driving behaviors during a policy period, in addition to their previous driving and claims history.  

Customized Coverage: Insurers can tailor coverage and provide more personalized policies to align with a policyholder’s specific driving behaviors, allowing them to move beyond traditional demographic and historical data and instead assess risk based on real-time driving behaviors.  

Loss Prevention: BBI data can be used to identify risky behaviors and provide opportunities to reward positive driving or reduce the likelihood of a future claim with targeted interventions, like driver education and training.  

Choosing the Right Approach 

When deciding between whether to offer a UBI or BBI program, it’s crucial to consider the specific insurance lines, customer preferences and ease of access to policyholder data. In commercial insurance, mixed fleets, from delivery vans to large trucks, are common and often come with multiple telematics devices. Insurers should consider how to collect and normalize location, event, vehicle and video data across multiple telematics providers and devices in a way that allows them to scale a program across a diverse client base.  

Commercial vehicles also have varying usage patterns compared to personal vehicles. This includes frequent stops, long hauls and different driving conditions. Models like UBI can be tailored to account for these patterns. Commercial auto insurance often includes driver training programs to improve safety. BBI or PHYD programs can be especially useful in incentivizing safe driving behaviors among commercial drivers. Ultimately, insurers may find value in combining elements of both UBI and BBI to provide more tailored and data-driven coverage solutions to their policyholders. It’s important to note that regardless of the approach, these all represent an opportunity for insurers to leverage technology to gain access to distinct, valuable data points that allow for more accurate pricing and segmentation.  

In conclusion, UBI and BBI represent two distinct but complementary approaches to underwriting. By understanding their differences and applications, underwriting professionals can make informed decisions about which model aligns best with their business objectives and customer needs. Whether it’s precise risk assessment for auto insurance or holistic profiling for other lines of insurance, these innovative approaches are reshaping the future of underwriting, and your business will benefit from leveraging the latest technology. 

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