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There is increasing pressure in many countries for the introduction of usage based insurance (UBI), sometimes referred to as "pay-as-you-drive" or "pay-how-you-drive". For many younger drivers insurance premiums based on their standard risk profile are not affordable. Therefore allowing insurance to be based on actual usage will give safe younger drivers more affordable insurance. In the developing world, where cars are starting to become affordable for an emerging middle class, lower insurance premiums based on UBI will also be invaluable. 

Rewarding good behavior
UBI can take the form of a simple measure of mileage, rewarding those drivers that drive fewer miles. Alternatively it can cross-reference GPS data with vehicle readings to look at time of day, location and speed, all of which are good indicators of risk. It could also take advantage of complex algorithms based on GPS data to measure factors such as acceleration and harsh braking to determine dangerous patterns of behavior. In the latter two examples the insurance can be provided in real time with a direct feedback to the driver of how driving behavior is affecting insurance.

Driving segmentation
There is a further, rather unusual, impetus for UBI in the EU. In March 2011 The European Court of Justice ruled that insurers will no longer be able to take the sex of the applicant into account when setting premiums. The ruling comes into effect from December 2012. The impact on the insurance industry is substantial. The ruling has taken away one of the main methods of segmentation. Furthermore there is the potential for age-based segmentation to also be prohibited sometime in the future. The reduced effectiveness of statistical risk profiling will push insurers in the direction of insuring based on actual usage.

There have been a number of experiments with pay-as-you-drive insurance in the past. UK insurer Norwich Union (now part of the Aviva group) ran trials of UBI in 2004 with 5,000 motorists. A commercial service was launched in October 2006. The policy adjusted payments based on time of day, type of road and mileage. For instance, Norwich Union had adaptive pricing based on the fact that rush hour driving is 50% more likely to result in an accident than evening or weekend driving, motorway driving is ten times safer than on urban roads, and serious accidents are more likely to occur at night. Pricing was based on a variable price per mile in all of these different circumstances. In 2008 the company abandoned the service quoting a lack of take-up.

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