Pay-per-mile v. Usage Based Insurance: How Do They Stack Up?

usage based insuranceA California startup recently introduced another model for auto insurance: pay-per-mile. This new company, Metromile, has a simple value proposition: The less you drive, the more you save. Unlike traditional car insurance premiums, their monthly “base rate” is calculated by miles per month. And unlike usage-based insurance (UBI), the company isn’t looking at driving behavior.

Who benefits … and who doesn’t?

For those who don’t drive a lot, the pay-per-mile model may produce lower rates, saving customers up to $500 per year, Metromile said. While Metromile won’t charge customers for more than 150 miles per day (250 in Washington), it’s an ominous price structure for drivers who are on the road frequently. Auto News put it this way: “Because of the industry’s risk-pooling practices, the break-even point is around 10,000 miles per year. Drive more than that … and conventional insurance would probably be cheaper.” According to Metromile’s website, per-mile insurance is currently only available in California, Oregon, Washington and Illinois.

How does pay-per-mile compare to usage based insurance?

Like usage based insurance, the pay-per-mile model could be an auto insurance game changer. Metromile CEO Dan Preston says, “70 percent of the variation in insurance claims filed can be chalked up to how much customers drive, with just 30 percent tied to driving habits.” With that stat in mind, pay-per-mile seems logical for certain segments of the market.

That said, Metromile operates much like first generation usage based insurance solutions, relying on an onboard diagnostic device known as a Metronome for data collection. Those of us who have watched the evolution of usage based insurance know firsthand that hardware is expensive and cumbersome, making it difficult to cost-effectively roll out and scale a program. The use of hardware creates inherent inventory, storage and distribution challenges – all expensive. Furthermore, there’s the chance that those who receive the hardware never actually install it, creating a separate issue of wastage.

Pay-per-mile innovators may be well-served to follow the lead of usage based insurance, and try a smartphone-based platform to track miles instead.

Different strokes for different folks

While a certain segment of the market will appreciate the simplicity of the pay-per-mile approach, others may be looking for more. For example, usage based insurance may continue to be a more attractive option for the following audiences:

  1. Those who drive a lot, drive safely, and want to be rewarded for their skill. No explanation needed here. If you drive a lot, and drive well, UBI is likely a more advantageous option.
  1. Millennials. On one hand, Metromile says their approach appeals to millennials, because younger customers drive less, relying on alternative modes of transportation. On the other hand, it lumps people together, which isn’t exactly the approach that Millennials covet. IA Magazine describes the millennial mindset this way: “Millennials have grown up in a world of individuality: I am unique, I am different, there’s nobody like me in the whole world. I have control of my life, I’m self-reliant, I get to make decisions – don’t tell me what to do.” Conversely, usage based insurance treats each customer as unique, offering millennials the opportunity to prove themselves on their own merits.
  1. Those who value relationships. As we said earlier, to gain long-term customers, you’ve got to build long-term relationships. Usage based insurance provides insurers opportunities to communicate positively with customers every time they drive – rather than making their only points of interaction the “potentially negative touch points” of “claims or billing.”

At the end of the day, both pay-per-mile insurance and usage based insurance have value. It really comes down to the audience you intend to serve, and your ability to cost-effectively introduce and scale the program.

To learn more about smartphone UBI, download our free report, “10 Reasons to Unplug and Unburden UBI.” Want to learn more about Driveway Software?  Get our Fact Sheet here.

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