What are Usage Based Insurance (UBI) policies? How are they different from the conventional policies

Insurance companies have traditionally created a few simple slots based on very basic criteria like demographics, location, engine capacity of the car and value of the car etc. Anyone who wants insurance gets fitted in these seemingly simplistic but rigid slots to determine the premium payable. Companies differentiate their offerings by providing options to buy additional covers, providing value-added features or services etc. However, by and large, there isn't anything fundamentally different between one policy and the other. The biggest void in this traditional insurance model is that it does not consider the driving skills in the entire insurance experience. The premium is largely the same for good and bad drivers. It does create an incentive for bad drivers to improve or good drives to continue their good work. In fact, the good drivers end up subsidising the bad drivers.The individual and the society at large are missing out on an opportunity to turn insurance into a force for greater good. Lastly, traditional insurance is not capable of showing its customers the areas of improvement in their driving.

Based on our analysis of more than 1 million kilometers of driving data that we have accumulated and analysed, we strongly believe that driving skill is the single biggest source of risk or determinant of someone getting involved in an accident and therefore driving skill should be a very important input in the insurance experience.

The solution to the above conundrum is Usage Based Insurance which as the name suggests is based on the individual's usage or driving. It uses a technology called Telematics. Telematics is a method of monitoring a vehicle. By combining a GPS system with on-board diagnostics it's possible to record - and map - exactly where a car is and how fast it's traveling, and cross reference that with how a car is behaving on the road.

Today, a great majority of people have access to smart phones and even the basic smart phones are equipped with sensors like gyroscope, accelerometer and magnetometer. These sensors working together with a suitable mobile application become the source of on-board diagnostics when the person driving the vehicle carries the phone in the vehicle and allows the mobile application to record and transmit data gained from these sensors.

Thus, the telematics technology when coupled along with an appropriate analytics engine is able to determine objectively and accurately the risk associated with an individual's driving. It can potentially determine how much premium the person needs to pay for insurance. This is the most important paradigm shift from traditional insurance.