How Does Usage-Based Fleet Insurance Work?

Usage-based fleet insurance aims to align premiums with usage and behaviour, potentially saving a fleet money if certain parameters are not breached. Learn how this innovative type of insurance might benefit your fleet.

Until the turn of the century, fleets insured vehicles, assets, goods, staff and third parties with what might be called ‘catch-all’ insurance policies. These products were designed to provide coverage to a wide range of fleet types, with varying numbers of vehicles and assets.

However, such policies could result in a fleet being over-insured - particularly in terms of mileage. And due to their simplistic nature, such policies would not be able to take account of things like safe driving habits.

Usage-based fleet insurance (telematics or ‘black box’ cover)

But after the turn of the century, a new kind of insurance was introduced, commonly referred to as ‘telematics’ or ‘black box’ cover, where the way a vehicle was being driven could be monitored.

If a vehicle was being driven well and within certain parameters, then the vehicle owner would be rewarded with lower insurance.

However, if a given vehicle is being driven poorly, or if it exceeds other agreed parameters, insurance premiums might be increased.

Over the last quarter of a century, telematics or ‘black box’ insurance has evolved significantly. Today, policies are more data-driven and better reflect the actual habits of a driver, precise mileage, or the characteristics of a fleet.

GPS and other sensors found in telematics systems monitor things like:

• Location
• Speed
• Braking
• Acceleration
• Idling
• Time of use

For some fleets, a usage-based insurance policy could be more beneficial than a regular policy.

The different types of usage-based fleet insurance

“Usage-based fleet insurance” is a general term for cover based on usage factors.

Specific kinds of usage-based insurance include:

• Pay-As-You-Drive (PAYD) (aka Pay-By-The-Mile): These premiums are based on the number of miles driven. This could be useful for fleets with varying usage levels, as you only pay for the distance covered.
  
  
• Pay-How-You-Drive (PHYD): These premiums are adjusted based on driver behaviour. Safer drivers - i.e. those who demonstrate smooth acceleration, travelling under speed limits, and who avoid harsh braking - may benefit from lower premiums.
  
  
• Pay-When-You-Drive (PWYD): These premiums are influenced by the time of day or night the vehicle is driven. For example, driving during peak hours or late at night may carry higher risks and thus higher premiums. Conversely, a fleet that does most of its business between the a.m. and p.m. rush hours may pay less.

What are the benefits of usage-based fleet insurance?

Usage-based fleet insurance - synonymous with ‘telematics’ or ‘black box’ cover - now offers a number of benefits to fleet owners and managers.

While individual products vary, these benefits might include:

Pay by the Mile

With ‘Pay By The Mile’ cover, costs are based on actual mileage, rather than estimates. This could result in significant savings for some companies.

Payments can be made in arrears

Policies can help ease a company’s cash flow situation, since payments are made in arrears based on actual mileage.

Self-install telematics devices

Some UBI providers provide devices that can be installed by the customer quickly and easily. Older telematic systems could require technical expertise to install, and involved higher initial costs. However, it should be noted that installation fees may still be levied by some providers (see ‘drawbacks’ below).

Fleet Managers can monitor their drivers discreetly

Modern telematics devices can provide a vast array of other information, particularly relating to how well (or otherwise) an employee is driving. They can provide accurate data on behaviours such as heavy braking, acceleration and idling, which can impact things like wear and tear and fuel consumption.

Data can be used to improve safety And efficiency

Armed with real-world data such as safety scores, fleet managers can identify unwanted driver behaviours and look at ways to improve performance - such as by offering additional training to drivers who might be falling short of expectations.

Pay less if perceived as being lower risk

Many factors influence insurance premiums, including when a vehicle is driven; vehicles driven in daylight hours, or outside rush hours, are perceived as less likely to be involved in an accident and may therefore be charged less for cover.

What are the drawbacks of usage-based fleet insurance?

While usage-based fleet insurance offers numerous benefits, it’s not without potential downsides. These include:

Privacy concerns

To function properly, telematics systems need to collect a lot of data, including:

• Location Data: Where and when vehicles are driven.
• Driving Behaviour: Speed, acceleration, braking and even cornering.
• Driver Identification: Who is driving the vehicle at any given time.

For some drivers (and fleet managers), this level of monitoring might feel intrusive and raise privacy concerns. Employees may feel uncomfortable knowing their every move is being tracked, which could lead to dissatisfaction or resistance.

Initial costs and installation

There may be upfront costs associated with implementing the system:

• Telematics Devices: Purchasing and installing telematics devices in each vehicle can be expensive, especially for larger fleets.
• Software Integration: Integrating telematics data with existing fleet management systems may require additional investment in software or IT support.
• Training: Drivers and managers may need training to understand how the system works and how to interpret the data.

While telematics systems might save money in the long run, these initial costs can be a barrier for smaller fleets or businesses with limited budgets.

Driver resistance

Drivers may view usage-based insurance plans as a form of surveillance, leading to resistance or reluctance to adopt the system.

Worries may include:

• Fear of Penalties: Drivers may worry that minor mistakes, such as occasional speeding or harsh braking, will result in penalties or higher premiums.
• Pressure to Perform: Constant monitoring might create stress for drivers, who may feel pressured to drive perfectly at all times.
• Lack of Trust: If drivers feel their employer doesn’t trust them; this could harm morale and lead to higher driver turnover rates (which are already an issue within the UK fleet industry).
  
  

Potential for higher premiums

While usage-based insurance can lower premiums for safe and efficient drivers, it can also lead to higher costs for those who exhibit riskier driving habits. Factors that could increase premiums include:

• High Mileage: Fleets that cover a lot of miles may face higher premiums under a pay-as-you-drive model.
• Risky Behaviour: Speeding, harsh braking, or driving during high-risk times (e.g., late at night) can result in higher premiums.
• Urban Driving: Vehicles driven primarily in urban areas with heavy traffic may be deemed higher risk, resulting in increased costs.

Data accuracy and reliability

Usage-based insurance relies heavily on the accuracy and reliability of the telematics data.

Potential issues include:

• Technical Glitches: Hardware or software malfunctions might lead to inaccurate data collection.
• Data Misinterpretation: Misinterpreting the data could result in unfair penalties or incorrect assessments of driver behaviour.
• Coverage Gaps: In areas with poor connectivity, data transmission may be delayed or incomplete, affecting the insurer’s ability to assess risk accurately.
  
  

Limited flexibility for certain fleet types

Usage-based insurance may not be suitable for all types of fleets - such as:

• High-Mileage Fleets: Fleets that consistently drive long distances may not benefit from pay-as-you-drive models, as their premiums could end up being higher than traditional policies.
• Specialised Vehicles: Fleets with specialised vehicles, such as heavy machinery or emergency vehicles, may not fit neatly into usage-based insurance offerings.
• Seasonal Variations: Fleets with highly seasonal usage patterns may find it challenging to predict and manage costs under a usage-based model, making the older insurance policies more attractive (and less complicated).
  
  

Dependence on technology

Usage-based insurance relies entirely on technology, which can be both a strength and a weakness.

Potential downsides include:

• Cybersecurity Risks: Storing and transmitting sensitive data exposes fleets to potential cybersecurity threats, such as hacking or data breaches.
• System Downtime: If the telematics system goes offline, it could disrupt operations and leave fleets without critical data.
• Compatibility Issues: Integrating telematics with existing fleet management systems may require ongoing technical support and updates.
  
  

In conclusion

While a usage-based insurance policy may not suit all fleets, in most cases it will offer a lower cost, fairer and more accurate way of managing fleet insurance needs.

It can also provide invaluable data which can be used to enhance safety, performance and efficiency, potentially further improving an organisation’s bottom line.