Usage-based insurance (UBI) also known as pay as you drive (PAYD) and pay how you drive (PHYD) and mile-based auto insurance is a type of vehicle insurance whereby the costs are dependent upon type of vehicle used, measured against time, distance, behavior and place.

This differs from traditional insurance, which attempts to differentiate and reward "safe" drivers, giving them lower premiums and/or a no-claims bonus. However, conventional differentiation is a reflection of history rather than present patterns of behaviour. This means that it may take a long time before safer (or more reckless) patterns of driving and changes in lifestyle feed through into premiums.

How pay how you drive insurance works

Pay how you drive insurance policies consider driving skills as their main factor when setting premiums. As mentioned above, if you are a careful driver who brakes gradually and observers speed limits among other rules, you are considered a skilled drive which translates to lower premiums.

Insurers are able to assess your driving skills by installing telematics tracking devices in your car to record driving information i.e. speed, braking, sudden/gradual stops, acceleration, concentration e.t.c. The information is then relayed to your insurer. It is important to note that many insurers offer their clients online access to this data. This helps individuals to monitor their own driving.

The main reason behind driving skills being the main premium determinant is; you are less likely to cause or be involved in accidents if you are a skilled driver. It is important to note that each pay how you drive insurer is at liberty to charge any amount depending on your driving skills.

Most insurers however set their rates based on your driving skills and the time you are most likely to be driving. Peak times attract higher premiums because there are many vehicles on the roads which increases the probability of getting involved in an accident.

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