The objective of this paper is to provide a critical review of the most popular and often implemented methodologies related toUsage-based motor insurance (UBI). UBI schemes, like Pay-as-you-drive (PAUD) and Pay-how-you-drive (PHUD), are a newinnovative concept that has recently started to be commercialized around the world. The main idea is that instead of a fixed price,drivers have to pay a premium based on their driving behaviour and degree of exposure. Despite the fact that it has beenimplemented only for a few years, it is proven to be a very promising practice with a significant potential impact on traffic safety.This is achieved by the financial incentive given to drivers in order to improve their driving behaviour such as reducing thenumber of harsh braking and acceleration events taking place or reducing their degree of exposure such as their annual mileage,the time of the day travelling etc. and therefore reduces traffic risk. It can also be beneficial towards other social objectives suchas traffic congestion and pollution emissions reduction.To this end, the existing literature on UBI schemes is critically reviewed and research gaps are identified. Findings show thatthere is a multiplicity and diversity of several research studies accumulated in modern literature examining the correlationbetween PAUD (based on driver’s exposure) and PHUD (based on driving behaviour) schemes and traffic risk in order todetermine accident risk. Moreover, it seems that UBI implementation would eliminate the cross-subsidies phenomenon, whichimplies less insurance costs for goods and less exposed drivers. Moreover, it would also provide a strong motivation for drivers toimprove their driving behaviour and reduce their degree of exposure by receiving feedback and monitoring their drivingperformance and exposure which would result in traffic risk reduction both totally and individually.