How does “usage-based insurance” (UBI) differ from traditional insurance?

Usage-based insurance (UBI) represents a significant shift from traditional insurance models by charging premiums based on actual driving behavior rather than just estimated risks. With UBI, insurance companies collect data from drivers through telematics devices or mobile apps. This data includes metrics like speed, braking patterns, how often the vehicle is used, and time of day driving occurs. By analyzing this real-time information, insurers can assess how safely a person drives and adjust premiums accordingly.

This personalized approach means that safer drivers can potentially enjoy lower rates, while riskier driving behaviors can lead to higher premiums. Traditional insurance, on the other hand, typically relies on broader factors such as the driver's age, location, and vehicle make when calculating premiums, which may not always reflect an individual driver’s specific risk profile. Thus, the correct answer emphasizes the innovative nature of UBI in creating a more tailored and potentially fair pricing system based on actual behavior.