Is Usage-Based Insurance the Future?

Chances are that if you haven’t yet heard about usage-based insurance, you likely will in the near future. This new system for determining auto insurance rates is growing in popularity and has already seen some success in the U.S. and the U.K. If it continues to see success over a longer period of time, it may well be the future of auto insurance; however, as with all changes there are both benefits and concerns regarding its implementation.

Understanding Usage-Based Insurance

Usage-based insurance is a system of rating that uses actual data from your car regarding your driving habits to help determine your rates. This can range from a simple recording of how many kilometers you drive on a daily basis to tracking the way you drive, including hard braking, sharp turns, and speeding. All of this data allows the insurance company to create a premium for you that reflects the way you actually drive, making it more individual and adaptable rather than being static and based on past information and estimates.

The Benefits of Usage-Based Insurance

Usage-based insurance has benefits for both the insurance company as well as for the driver. It allows the insurance company to use current data to adjust their traditional methods of rating insurance policies, often in the driver’s favor. Traditional rating methods use a combination of historical data, statistics, and information provided by the driver (miles commuted each day, for example) to determine rates. The new system works together with traditional methods. Because the information is being gathered constantly, the rates can change to reflect and differences in your usage. That means that if you start driving less and riding your bike in the summer months, you will could see that reflected in lower rates.

Impact on Fraud

Insurance companies can also use the information to help them handle claims better and to avoid insurance fraud. Telematics, the devices that are used to transmit information about driving habits, can record things like where the car was and how fast it was moving at the time of an impact, helping to sort out what really happened in an accident. This information has the potential to help insurance companies spot fraudulent claims and thus reduce the overall cost of insurance.

Privacy Concerns

Telematics have raised some privacy concerns among drivers due to the sort of information they record. Some of these devices record not only the information about how the car is being driven, but where the car goes as well. GPS can be used to give the insurance company information regarding where you drive on a regular basis – information that is statistically significant for calculating the odds of an accident occurring. Insurance companies using these programs are offering assurances that the information will remain private, and so far the programs have been free of privacy issues where they have been implemented both in Canada and abroad. Like every other instance where private information is being transmitted, a privacy policy will protect customers from having their information used in inappropriate ways.

Cost of Implementation

The use of telematics comes at a cost, which makes it slow to be implemented. Installing and monitoring systems in customer cars takes time and effort, which may slow the popularity of these systems. Some systems keep costs lower by using the customer’s cell phone or GPS to transmit information rather than installing a separate device for monitoring. There is not expected to be any cost to the consumer related to using this type of system.

The Future of Usage-Based Insurance

Currently, a usage-based insurance system is voluntary, and is available from a few insurers in Canada. This means that it’s up to you whether you want to try a usage-based policy, and only if your insurance company offers it. The success of these few available programs is likely to help determine how widespread usage-based insurance will become in the future. Improvements to the technology used for these programs are also likely to make them more popular, increasing their spread across the country. While the insurance industry will continue to rely of traditional rating methods, it is likely that the future holds a more dynamic and individualized approach to auto insurance.