The rising cost of living has had a significant impact on how people buy auto insurance – especially younger drivers, who traditionally pay higher premiums and are more motivated than ever to seek out more affordable ways to ensure they're fully covered for the driving they do. According to data from Quotezone, 17-year-olds in the UK are now paying 77% more for car insurance than they did last year. Younger people are also less likely to own a car, with driving no longer a daily activity: Deloitte has found that globally, Gen Z and Millennials are more likely than others to favor car subscription services over ownership.
The global usage-based insurance (UBI) market is growing rapidly, projected to reach $267.4 billion by 2032. While 21% of global auto insurance customers already have a pay-as-you-go policy, 84% of global consumers who have used this type of insurance are likely to recommend it to a friend or colleague (GlobalData).
As car ownership declines in favor of carshare options and driving habits change, we're going to see a major shift toward pay-as-you-drive – or usage-based – models in the next five years, led by the younger generation of drivers.
The growth of UBI and the on-demand economy relies on younger people
Certain fast-growing industries such as the on-demand economy – characterized by the likes of Uber, Amazon Flex, DoorDash and Deliveroo – are already accelerating this shift. Our research shows that people – especially young people aged 18-35 – are turning to rideshare and delivery driving for on-demand economy apps to supplement studies or employment.
The younger generation is typically less worried about the data they share, especially if there is a value exchange. A global study by Jack Morton found that people aged 18-29 are the most likely demographic to show an interest in exchanging personal data for tangible benefits (cash or goods and services), at 38% versus an average of 30%.
In addition, on-demand work is fundamentally different from traditional employment. Much of it is part-time or variable, meaning standard commercial insurance products are either too expensive or provide more coverage than is needed. Because many drivers in the on-demand economy only drive 5-10 hours a week, they need flexible insurance that fits their lifestyle – not a one-size-fits-all policy. That's why UBI is such an appealing prospect for drivers in the on-demand economy: usage-based insurance products offer more affordability and flexibility than traditional products.
Creating value through data in the on-demand economy
To deliver cost-effective and appealing UBI products that promote driver safety, insurers must rely on data that gives them accurate information including, what, how, when and where their customers are driving.
One way to gather and leverage this data is through telematics technology, which can provide valuable, detailed insight into driver behavior. However, the product only works if it's reliable - and consumers believe in its reliability. According to 2024 data from the UK's Financial Ombudsman Service (FOS), consumers encountered various issues with their telematics-based insurance policies last year – including policy cancellations and penalties incurred due to faulty technology inaccurately recording them speeding, or simply because they went away for a month. If drivers don't understand how their premium is calculated, or they sense unfairness in the way they are treated, they disengage.
But telematics isn't the only way to create safe, cost-effective usage-based policies that drivers can trust. When it comes to UBI, data is key – and partnerships can unlock valuable data points, especially in commercial arenas such as the on-demand economy. Platforms like Uber generate a rich set of real-time data, from driver behavior and route patterns to pickup/drop-off locations, weather conditions, and performance scores. Not only is this data extremely reliable and accurate, it enables a smarter, more dynamic approach to underwriting and pricing – far surpassing the static information used by traditional insurers, such as credit scores or outdated driving histories, and less troublesome to set up than telematics solutions, which require the installation of apps and tracking devices in vehicles.
The growing volume of new real-time datapoints coming from the on-demand ecosystem, including platforms and drivers – as well as the rise of autonomous vehicles – are bringing AI to the forefront of innovation in insurance, and accelerating insurance specialists' ability to spot trends to create better products for the industry. Insurers who are innovating successfully in UBI use technology to tap into this data to design insurance solutions that benefit all involved – ensuring drivers get better-priced, more relevant coverage, while platforms can better support and retain their drivers, and insurers gain access to better risk assessment and stronger returns.
For example, many drivers in the gig economy work part-time to supplement income; a traditional, annual commercial policy would not be financially accessible for many of these drivers. In response, some insurers have created usage-based solutions that allow drivers to pay for insurance only for the time they are actually working, aligning the cost directly with their earnings.
Transparency builds trust
As the telematics market has evidenced, the insurance industry still has work to do to ensure these policies are fit for purpose, make insurance fair, transparent and easy to understand – and ultimately, to build trust amongst the new drivers entering the market.
In the on-demand economy, UBI policies that draw on data points that consumers trust and understand, they're more likely to engage. For example, when delivery drivers can see their detailed driving history in the partner app – and they're paying insurance by-the-minute – they know that they are being treated fairly and paying only for the driving they do. This level of accuracy is especially important in the on-demand economy, where people's livelihoods depend on maximizing the return on the work they do.
As the industry adapts according to the needs of its newest consumers, one thing is clear: UBI needs to be fair, transparent, and easy to understand in order to continue to work for the people who rely on it.
