Usage-Based Insurance: What it is, How it Works [Updated]

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According to a report from IHS Automotive, by 2023, 142 million people worldwide will be subscribed to usage-based auto insurance, in comparison to the reported 12 million that use it today. Since usage-based insurance was introduced in Canada a few years ago by a handful of insurers, many more are now offering this type of coverage to consumers. Consumers, however, still have not yet fully embraced the technology and many are still unsure about how it works and if it will really save them money in the long-run.

On this episode of #AskAnneMarie, insurance expert Anne Marie explains how this special type of policy works and how it can lead to discounts on your car insurance. Watch the video below and learn more from our #AskAnneMarie episodes!

What is usage-based insurance?

Usage-based insurance (UBI) is a voluntary type of policy that bases your insurance rates on your specific driving skills and behaviours, rather than solely relying on the traditional formula most insurers use. With usage-based insurance, the way you drive will determine if you’re eligible to get a discount off your insurance.

How are premiums calculated?

Traditional methods of determining insurance rates use the information provided by the driver (like where you live, the type of vehicle you drive, your driving record, and your insurance history) coupled with the insurer’s own claims and loss experience. All of this is pooled together to determine how much you’ll pay for car insurance.

Usage-based policy premiums use much of the same information; however, premiums may be discounted on renewal depending on how you drive throughout the year. With the use of a device that plugs into your car, indicators of how safely you drive are monitored; like the actual distance you drive, how often you drive, and habits such as how often you brake hard, turn sharply or if you regularly speed.

How information is gathered

UBI systems use a special telecommunication device (also known as telematics) to gather information. The small device is easily plugged into the car and requires minimal attention once installed. Some insurers even offer a discount of five to 10 per cent upon just installing the device.

Privacy concerns

One of the major concerns that most people have with UBI is privacy. All insurance companies and brokers must ensure that the use of driver and vehicle information meets with the privacy legislation in the province. That way, your information will be protected properly and can’t be used for any purposes other than the determining if you’re eligible for a further discount.

With that being said, the data collected cannot be used to deny a claim, cancel your policy, or even increase your rates. The data is only used to monitor your eligibility for discounts.

How to purchase usage-based insurance

This is a completely voluntary policy and not all insurers carry it. So if you’d rather opt for usage-based insurance than a traditional policy, compare rates from providers that carry UBI policies at Canadians who have opted in have already reported to see a decrease in their insurance rates of up to 25 per cent upon renewal.