The automobile insurance industry in the US alone made $327 billion in 2022. Worldwide, the market is worth around $780 billion according to Mobility Foresights. This industry involves various kinds of vehicle cover, and one sector is known as usage-based insurance.
While it seems that usage-based insurance is new, it has been in existence for around 3 decades now. But, it is in recent times that it has become more visible.
Insurance companies in many countries are seeing gains from offering usage-based policies, as are their customers. In London, Zego is just one firm providing usage-based insurance to commercial drivers. But, regular individuals appear to be taking out these policies to legally cover their vehicles too.
But, is usage-based insurance just a fad, or is there real growth in this sector? Why would this type of insurance become popular, and is there a potential investment opportunity here?
What is usage-based insurance?
There are a number of terms for this type of insurance. You may hear of pay-how-you-drive for instance or mileage-based insurance. But, they are all referring to the same kind of insurance that is aimed at particular kinds of drivers.
One benefit of usage based insurance is that drivers can reduce costs by displaying better driving behaviors. This type of insurance uses telematics systems technology to record certain aspects surrounding the policyholder’s driving.
This can include the following:
- Location
- Time of driving
- Hours driven
- Acceleration
- Phone usage while driving
- Distance covered
- Cornering
- Braking
- Speed
Information is recorded while the vehicle is in use, and this is transmitted to the insurance company, or a third party authorized to analyze the data. This helps to produce a picture that can result in more accurate and fairer insurance costs.
Typically, age, gender, occupation, and other metrics have been used to evaluate how much a driver should pay for insurance. Telematics allows the insurance company to view how someone actually drives, and what risks they may pose.
How is the usage-based insurance sector performing?
Telematics was first introduced in the 1990s by the aptly named Progressive Insurance. It was in the late 2000s that it started to see traction, and in recent years has become a regular addition to many insurance companies’ services.
In 2021, this sector of the insurance market was worth $19.6 billion. But, with a CAGR of 27.7% up to 2026, the usage-based sector is perhaps the fastest-growing area of the insurance industry. By 2026, it is expected this area will have a value of $66.8 billion.
The insurance market in general is expected to grow exponentially over the next 5 years or so, and more on that further below. Nevertheless, the usage-based sector stands out in particular.
Why is this sector growing so fast?
Uber, Lyft, and other ride-sharing apps may have something to do with usage-based insurance demand. More people are looking at the gig economy for income whether full-time or as a supplement.
As the economy gets tougher, any way of saving money is welcome, and usage-based insurance offers the driver ways to do this.
Reduced insurance costs
Taxi drivers don’t keep all their fares if they work for a cab firm. They may have to pay their fuel costs too. So, seeking out cheaper insurance makes sense. Usage-based insurance rewards safe driving.
Only pay for the miles driven
Companies offer different versions of usage-based insurance. However, it is common for them to take into account what mileage is driven when deciding on the cost of the policy. Drivers may have the option to pay yearly, monthly, or top-up as necessary. Why should someone pay the same as another driver who covers more mileage each year? Usage-based insurance takes this into account.
The gig economy is growing
As the cost of living rises, more people are looking for side gigs. Online businesses for side hustles are plentiful, but many people have discovered driving part-time can be fruitful.
Backlinko reports that around 3.5 million individuals drive under the Uber banner. Depending on the country they operate in, they may need to pay for private hire insurance. Having purpose-designed insurance for private hire drivers is beneficial for those with good driving behavior.
Advice for lowering insurance costs is available
While telematics data is used to assess risk, it can also be used to give tips to drivers. Pointers on where a driver can improve can be sent to the policyholder. This can then lead to lower insurance payments over time.
Designed for all manner of drivers
Those who drive for a living need insurance that suits their role. Whether someone is a taxi driver, or courier, or working in food delivery, they legally require insurance. But whether you are driving for commercial purposes, employment, or pleasure, usage-based insurance can fit.
Judged on your merits
Instead of being lumped in with every other driver of similar age in your area, you will be able to prove that you are a safe driver. Telematics should give a far more accurate display of who is a risk to an insurance company, and who deserves to pay less.
The cost of insurance is a major reason why drivers are taking up usage-based policies more now. The cost of living, inflation, and soaring fuel prices mean that people need to find other ways of saving and making money.
This has led to many more people driving for a living, and this means some are being unfairly penalized. Uber drivers often pay higher insurance costs than other drivers. Usage-based insurance gives the driver a chance to prove they should be charged less.
Is insurance a possible investment opportunity in 2023?
The global insurance industry is a beast. In 2020, it was valued at $4.47 trillion. IBISWorld puts the insurance industry in the top 5 regards the number of businesses. Some 1,109,158 brokers and agencies were operating across the world in 2022.
Verified Market Research has reported that the market will grow to $224 trillion by 2028. This represents a CAGR of 63.13% between 2021 and 2028. A huge growth has started to attract a more diversified set of investors.
Private equity investors love start-ups, and in particular, seem to gravitate toward tech enterprises and new industries. Biotech and communication technology might attract a venture capitalist, but not normally insurance.
Nevertheless, 2021 saw an interest in this area, and many venture capitalists invested in insurance start-ups. Many investors have seen the benefits of adding insurance stocks to their portfolios for the long-term returns they produce.
With usage-based insurance growing, and the parent industry expected to continue to be one of the biggest in the world, long-term investors should see strong returns. However, professional advice for any investment is often worth seeking out.
Summary
Usage-based insurance is growing simply because it rewards the policyholder for their driving behavior. Being penalized for other people’s claims and accidents has never made for balanced or fair insurance costs. Now, anyone who holds a usage-based policy can help themselves achieve lower insurance payments.
Of course, the reverse is true. If data constantly shows a driver to be high-risk, their premiums could increase. Insurance is an investment in itself, but as the industry grows and introduces new services such as usage-based cover, it could make for a good addition to your portfolio.