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Why UBI's Are Beating Traditional Car Insurance Quotes

Finding the right car insurance isn't easy. It's confusing and time consuming, which is why most American's don't do it. According to a survey by Insurance Quotes, the average American has been with the same insurance company for more than a decade.

At the same time, car insurance is expensive. In 2014, the average annual cost of car insurance was $907.38, according to ValuePenguin. Insurance rates vary according to state; the highest rate was in Michigan at $2,551 annually.

Insurance costs are usually based on personal data, car information, driving history and other factors, according to the National Association of Insurance Commissioners. For instance, a young male driver will typically pay more than a young female driver. However, an older male driver would probably pay less than the young female driver. But all these statistics may take a backseat in the near future!

A New Way to Look at Insurance
Recently, insurers have begun thinking about insurance in a different way. Traditional insurance plans use demographics and other information to ascertain how a person probably drives. However, technological advancements have made it possible to observe how drivers actually drive. With these advancements, many insurance agencies have agreed it makes sense to offer drivers a plan that charges policyholders based on data specific to the individual, rather than statistics.

This is called Usage-Based Insurance. UBI makes use of devices in the car which has the ability to record driving speed, distance, location, time of day, how hard the driver brakes, among other things. Though they have all of these abilities, insurance companies don't always use them all.

According to U.S. & World News Report, Progressive, Allstate, State Farm and Travelers are some popular companies that offer UBI. Travelers' IntelliDrive program uses a GPS aspect to see where the car is being driven. Some insurance companies and their customers think this is an invasive technique, but others see the merit in it. Parents of teen drivers like knowing they can check where and how fast their child is driving. This also would be beneficial in the event of a car theft.

One of the main draws to UBI is the possibility of saving money. According to NerdWallet, many of the programs use a formula to determine a discount rate, which takes into account various factors such as speed, hard braking and time of day. DriveSense, a program offered by ESense, boasts the possibility of saving consumers up to 30 percent on their insurance costs.

Steve Pretre, the CEO and co-founder of a start-up UBI company, told U.S. & World News Report that the average American drives 11,000 miles a year. However, only about a third of people drive more than 10,000 miles annually. That means most drivers drive much less than that.

For drivers who only occasionally use their car or use it for short periods of time, it doesn't make sense to pay a large insurance fee. Pretre's company, MetroMile, charges based only on how much policyholders drive. The device used in this instance keeps track of the actual number of miles driven each month and a payment is automatically made based on that number.

"36 percent of insurance providers will have UBI programs by 2020."

The Future of Car Insurance
The idea of UBI is catching on rapidly. A report from Visiongain explains how the UBI market will grow over the next decade, according to a press release. According to the report, in 2015, there will be about 21.7 million UBI policyholders worldwide, nearly twice as many as last year. In the next five years, the report estimates that more than $60 billion worth of car premiums will be developed through UBI. According to NerdWallet, in that same time, 36 percent of insurance providers will have similar programs.

Insurance companies are racing to find ways to improve the market for their consumers. State Farm and Progressive both recently filed patent applications for systems that will help correctly price insurance rates based on the drivers.

State Farm's system will use time of day, distance, number of passengers, speed, driving behavior and the weather to determine costs. Progressive's system takes these factors into mind, but adds some more, like who the driver is, pitch and roll, acceleration and deceleration, how far away other objects are and whether turn signals, headlights, windshield wipers, horns, brakes, radios and seat belts were used.