Usage-based insurance: what it is and how it works

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Since usage-based insurance was introduced in Canada in 2013, many providers now offer this type of coverage in Alberta, Ontario, Quebec, New Brunswick, Prince Edward Island, and Nova Scotia.

Consumers, however, might be unsure about how UBI works and whether it will really save them money in the long run.

Former insurance expert for, Anne Marie Thomas, who is now director of consumer and industry relations at the Insurance Bureau of Canada, explains how this special type of policy works, and how it can lead to discounts on your car insurance.

What is usage-based insurance?

Usage-based insurance (UBI) is a voluntary type of policy that bases your insurance rate on your specific driving skills and behaviours, rather than solely relying on the traditional formula most insurance providers use.

With usage-based insurance, the way you drive will determine if you’re eligible to get a discount off your insurance. In some provinces, like Ontario, Alberta, and Quebec, it will also determine whether a surcharge is applied to your rate if you engage in unsafe driving.

How are premiums calculated under UBI?

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 insurance provider’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 the UBI device is installed.

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 determining if you’re eligible for a discount (or, in some provinces, subject to a surcharge).

That being said, the data collected cannot be used to deny a claim or cancel your policy.

How to purchase usage-based insurance

This is a completely voluntary policy. So, if you’d rather opt for usage-based insurance than a traditional policy, compare rates from providers that carry UBI policies. You could see a discount of up to 30% upon renewal, depending on who your provider is.

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