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Usage-Based Insurance and the Future of Auto Coverage
The traditional model of auto insurance — where premiums are set using static factors like age, location, and credit history — is undergoing a profound shift.
Introduction
At the center of this transformation is Usage-Based Insurance (UBI), a pricing model that leverages real-time driving data to tailor premiums based on how, when, and how much a person drives. By using telematics technologies, insurers can now assess risk with far greater precision, offering more personalized, transparent, and fair insurance coverage.
This model is particularly attractive to younger drivers, tech-savvy consumers, and low-mileage drivers who may have been overpaying under traditional insurance structures. With the rise of connected vehicles, smartphone-based tracking, and the growth of the Internet of Things (IoT), UBI is quickly moving from a niche offering to a mainstream solution.
From an industry perspective, UBI represents a win-win:
Consumers benefit from lower costs if they drive safely or infrequently.
Insurers gain better risk data, reduced fraud, and stronger customer engagement.
Regulators and cities see improved driving behavior and road safety outcomes.
The relevance of UBI is expanding beyond individual drivers as well. With the rise of shared mobility services, autonomous vehicles, and the increasing digitization of car ownership, usage-based models are becoming central to how auto coverage is structured in the modern economy.
Market Size and Growth Outlook
Reflecting this momentum, the global UBI market is on a strong upward trajectory. In 2023, it was valued at USD 32.1 billion, and it is expected to reach USD 299 billion by 2033, growing at a Compound Annual Growth Rate (CAGR) of 25.5% over the forecast period. This dramatic expansion highlights both the consumer appetite for personalized coverage and the technological readiness of insurers to deliver it.
As shown in the chart below, the next decade is set to bring exponential growth in UBI adoption and market value:
As the global usage-based insurance (UBI) market evolves, insurers are tailoring product offerings across three core models: Pay-As-You-Drive (PAYD), Manage-How-You-Drive (MHYD), and Pay-How-You-Drive (PHYD). These packages represent varying levels of data integration and behavioral insight — and together, they signal a growing emphasis on customized, real-time pricing.
Pay-As-You-Drive (PAYD) and Manage-How-You-Drive (MHYD): Together Leading the Market
In 2024, the combined share of PAYD and MHYD models accounts for 65.8% of the global UBI market. These models appeal to a broad range of users seeking cost-effective, transparent pricing and real-time driving feedback.
PAYD is particularly popular among urban commuters and low-mileage drivers, offering premiums based primarily on the number of miles driven. It provides a straightforward, usage-aligned structure that appeals to those who drive infrequently or want predictable, distance-based billing.
MHYD, meanwhile, is the fastest-growing segment, advancing at a CAGR of 13.45%. Unlike traditional pricing approaches, MHYD programs actively coach drivers through in-app alerts and in-vehicle prompts, aiming to prevent risky behavior before it leads to claims. This proactive engagement enhances road safety and contributes to stronger long-term profitability for insurers by reducing claim frequency and improving retention.
Together, these two models reflect a customer-first shift in the industry, where pricing is aligned not only with risk but with behavioral improvement and value-added user experiences.
Pay-How-You-Drive (PHYD): A Solid, Behavior-Driven Segment
Pay-How-You-Drive holds a 34.2% share of the UBI market in 2024. This model relies on telematics data to assess driving habits — such as braking, acceleration, cornering, and speeding — and adjusts premiums accordingly. It rewards safe, consistent behavior with discounts and has become a preferred option for both insurers and drivers seeking a performance-linked pricing structure.
Programs like Progressive’s Snapshot and Allstate’s Drivewise are emblematic of this approach, using smartphone apps or plug-in devices to track driving patterns and deliver personalized insights. PHYD models strike a balance between risk-based underwriting and user transparency, making them a stable foundation in the UBI ecosystem.
The Emergence of Blended Models
As the market matures, many insurers are integrating features from all three packages into hybrid offerings. By combining mileage-based tracking with behavioral analytics and real-time coaching, these solutions provide holistic risk assessment and enable more precise pricing. Examples include American Family’s DriveMyWay, which layers coaching tools atop PAYD metrics, and Root Insurance, which relies on mobile sensors to personalize quotes before offering coverage.
This trend toward comprehensive, adaptable pricing models reflects the broader transformation of auto insurance: one that is becoming increasingly digital, data-driven, and customer-centric.
Technology Comparison & Trends
While OBD-II-based telematics continues to dominate the usage-based insurance (UBI) landscape, other technologies are steadily gaining momentum. Smartphone-based UBI solutions appeal to insurers seeking low-cost deployment and fast scalability. These models leverage mobile sensors to capture driving behavior, making them attractive for younger, tech-native demographics. However, concerns around data accuracy, battery consumption, and privacy continue to limit widespread adoption.
On the other hand, embedded telematics—installed directly by original equipment manufacturers (OEMs)—are emerging as a compelling alternative. These systems offer seamless integration, real-time data streams, and higher data fidelity, positioning them well for the future of connected mobility. Despite their potential, growth is currently constrained by longer vehicle replacement cycles and the need for close OEM–insurer collaboration.
Looking forward, the UBI market is expected to evolve alongside broader trends in mobility technology. Advancements in AI and predictive analytics, edge computing, and vehicle-to-everything (V2X) communication will allow insurers to move beyond retrospective risk assessments toward proactive, real-time risk pricing. As telematics become more embedded in everyday driving, UBI will play a key role not only in customizing premiums, but in shaping safer and more sustainable transportation behavior.
Key Drivers Fueling the Growth of Usage-Based Insurance (UBI)
The expansion of the global Usage-Based Insurance (UBI) market is being driven by technological innovation, changing consumer behavior, and new distribution models. Below are the top forces shaping UBI growth over the next decade:
OEM-Fitted Connected-Car Platforms (+2.8% CAGR Impact)
The rise of factory-equipped connected vehicles is reshaping how insurers access driving data. Under frameworks like the EU Data Act, automakers are required to share real-time data, enabling more accurate risk scoring. With 177 million connected cars expected in the EU by 2030, insurers benefit from better underwriting and customer retention. Partnerships such as Kia–LexisNexis show how OEM-insurer collaboration is unlocking value. However, smaller carriers may face obstacles due to data-access fees.
Cost-Conscious Younger Drivers (+2.1% CAGR Impact)
Rising costs are prompting Gen Z and millennials to embrace UBI for personalized pricing and discounts of up to 50%. In 2024, 26% of new U.S. auto policyholders chose telematics-based insurance. Smartphone-based UBI eliminates hardware costs and adds gamified features to keep users engaged, helping insurers build loyalty and advocacy in this tech-savvy segment.
Fleet Management and Pay-Per-Mile Bundling (+1.9% CAGR Impact)
Commercial fleets are adopting UBI bundled with fleet management tools that already track fuel, routes, and compliance. In Australia and New Zealand, connected fleets are set to grow from 1.6M to 2.7M by 2028. Fleets using GPS-based scoring have cut accident-related costs by 19% and saved up to 20% on insurance. UBI is fast becoming a standard offering in logistics.
Embedded Insurance in Ride-Hailing Apps (+1.4% CAGR Impact)
Ride-hailing platforms now offer automated, point-of-sale coverage via APIs like Cover Genius. Products like Chubb Ride Cover bundle protection into the ride experience, appealing to gig-economy and urban users. This embedded model is gaining momentum in Asia-Pacific, enabling insurers to reach new customer segments.
Government Regulations (+1.8% CAGR Impact)
Policy mandates like event data recorders (EDRs) are boosting access to high-fidelity crash data, improving risk models. As EDRs become standard in Europe—and possibly North America—insurers gain a clearer picture of real-time incidents, enhancing claims processes and pricing accuracy.
Reinsurance Innovation (+1.2% CAGR Impact)
New variable-rate reinsurance models are rewarding carriers with favorable loss ratios, giving insurers more financial flexibility. These treaties are encouraging investment in UBI, improving capital efficiency and supporting long-term profitability in an evolving underwriting landscape.
Restraints Impacting the Growth of Usage-Based Insurance
Despite strong growth potential, several key restraints may slow the expansion of Usage-Based Insurance (UBI). Understanding these is vital for insurers and stakeholders.
Heightened Data-Privacy Regulation (-1.8% CAGR Impact): Regulations like GDPR and CPRA impose strict rules on collecting and using personal driving data, crucial for UBI. This mostly affects Europe and California now, potentially lowering growth by 1.8% in the short term. Compliance and transparency are essential to maintain trust.
Patchy Actuarial Record for Smartphone-Only Scoring (-1.2% CAGR Impact): While smartphone telematics are scalable and cost-effective, inconsistent data quality weakens risk assessment confidence, possibly reducing growth by 1.2% over 2-4 years. Better data calibration is needed.
OEM Data-Access Fees Increasing Costs (-0.9% CAGR Impact): Embedded vehicle telematics from OEMs come with rising access fees, raising insurer costs and potentially cutting growth by 0.9%. Partnerships and data-sharing will help ease this burden.
Rising ADAS Penetration Shrinking Risk Pool (-0.7% CAGR Impact): Growing use of Advanced Driver Assistance Systems (ADAS) improves safety but reduces high-risk driver pools, limiting UBI’s addressable market and lowering growth by 0.7% long term. Innovation in products and underwriting will be needed.
Conclusion
Usage-Based Insurance (UBI) is fundamentally transforming the auto insurance landscape by leveraging real-time driving data to deliver personalized, transparent, and fair coverage. This innovative model is gaining strong momentum, driven by advancements in telematics technology, evolving consumer preferences, and the integration of connected vehicles into everyday mobility. The projected rapid growth of the UBI market underscores its potential to reshape risk assessment, pricing strategies, and customer engagement across the industry.
However, insurers face critical challenges that must be carefully managed to realize this potential. Heightened data privacy regulations such as GDPR and CPRA require rigorous compliance frameworks to safeguard consumer trust. Additionally, issues related to data quality, especially in smartphone-based telematics, alongside escalating OEM data-access fees, introduce operational complexities and cost pressures. Furthermore, the increasing prevalence of Advanced Driver Assistance Systems (ADAS) will inevitably reduce the pool of high-risk drivers, demanding continuous innovation in underwriting models and product offerings.
Looking forward, the insurers that succeed will be those who embrace digital transformation, invest in strategic partnerships, and prioritize customer-centric innovation. By combining robust data analytics, AI-driven insights, and flexible product designs, they can effectively address regulatory, technological, and market challenges while unlocking new growth avenues. Beyond commercial benefits, UBI also plays a pivotal role in promoting safer driving behaviors and fostering more sustainable transportation ecosystems.
In summary, the future of auto insurance is set to be usage-driven, data-informed, and highly adaptive—delivering value not only to insurers and consumers but also to regulators and society at large.
Sources & References
Automotive UBI Market Insights and Growth Projections – Fortune Business Insights
Comprehensive UBI Market Analysis and Forecast – Market.us
Global UBI Market Trends and Competitive Landscape – Mordor Intelligence
