Usage-based insurance for auto-related purposes, also called behavior-based or pay as you go insurance, is a type of insurance that offers low premium rates and flexible coverage options to insured motorist. Usage-based insurance for auto is also called single usage insurance, in which automobile telematics is utilized to monitor and measure certain metrics of driving behavior of the insured motorists, such as driving speed, incidences of hard driving, and mileage driven.

The payment for usage-based insurance for auto is calculated by assigning a usage value to each insured activity. These values are then summed over all insured events. The resulting value is then divided by the number of insured events to come up with an estimate of how much an insurance company would charge for those events.

This type of insurance for auto was initially developed and introduced in North America. In North America, the term "usage-based" refers to the use of data from telematics in order to provide a more complete picture of how consumers use their vehicles and what they do while they are on the road. Telematics can be defined as a method of collecting and comparing real-time data on vehicle use from a variety of sources, including insurers. Telematics systems can be integrated into other types of auto insurance systems to provide even greater benefits to consumers.

Region based study on Usage-based Insurance

In North America, usage-based insurance for auto refers to the integration of a black box system, a term used to refer to a vehicle's computerized system that monitors and records vehicle usage and performance. The original concept of this system came from the US Department of Defense, which had found its black box technology to be highly useful in the monitoring of operations in the war theatre. The system was later adopted by several automobile manufacturers in the late 1990s in the hope of reducing the costs incurred in maintaining their vehicles and saving them from potential losses due to poor vehicle maintenance. The system is now used in nearly all major auto insurers and is gradually becoming more popular in North America.

In Asia Pacific, the term "usage-based" refers to the use of data collected from a variety of sources in order to provide a more complete picture of vehicle use and performance. However, unlike Europe, which has historically had a positive view of telematics, the views of some Asian countries have been less positive. In the past few years, there has been a trend within the Asian markets to de-value the life cover provided by vehicles and focus solely on insuring the value of the vehicle. Despite this move, there has been limited attempts by Asian countries to adopt telematics. For example, India has established a dedicated government body, the National Development Agency (NDIA), to oversee the development of telematics and its related technologies. In Malaysia, a similar initiative has been launched in order to improve the efficiency of vehicle telematics.

While both NDIAs and Malaysia are focused on improving the efficiency of vehicle telematics, they differ in terms of their goals. In India, the overall objective is to introduce more technological solutions to help service providers save more on their premiums. The major areas of improvement that are expected include improving the accuracy of coverage calculations, better calculation of premiums for younger drivers, and the introduction of a national multi insurer facility.

On the other hand, in Malaysia, the main objective is to introduce a more rational use of automotive telematics and focus on developing telematics systems that work with a wider range of customers, especially small and medium-sized enterprises (SMEs). As a part of these efforts, the Malaysian authorities announced that they would no longer allow car companies to classify their customers into basic or premium categories based on their driving behavior. The decision was prompted by the fact that such practices can lead to inaccurate use of statistical information which can seriously affect the insurance premiums charged by insurers. In addition, the proposed changes also stipulated that insurance companies would not penalize insurers for changing their underwriting criteria, which can also have a negative impact on the accuracy of their pricing.

The two policies are being administered by the Center for Automotive Analysis Research (CAAR), an agency of the Indian Ministry of Finance. The Department of Transport in the United States is also a part of this alliance. In a related move, India's Department of Shipping has also signed an agreement with the United States Department of Transportation for the exchange of data on accident data for use in providing usage based pricing to automotive insurance companies. This move is believed to strengthen the efficacy of telematics for both users and sellers.

Telematics usage is a very important measure to reduce costs for all vehicle users, particularly for small and medium sized enterprises (SMEs) across the country who have traditionally suffered from a lack of access to insurance services due to their limited or no market share. The proposed changes to the Vehicle Usage Based Pricing System will enable vehicle owners to choose their own premium rates and keep them as flexible as possible. It has been found that the current system is not very useful for most buyers. The insurance premium rates charged by vehicle owners are based on the statistical record of how they drive compared to others of the same age and gender. These records are frequently inaccurate and outdated and are often inaccurate enough that premium rates cannot be predicted by the policy holder using available statistical data.