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The Pros and Cons of Usage-Based Insurance

November 19, 2013

Pros and cons

One of the latest advancements in the insurance industry, usage-based insurance is designed to help drivers get a more individualized rate that is based on where and how they drive. There are a number of potential benefits to both drivers and to insurance companies from these programs, and also a few potential drawbacks.

Potential Benefits of Usage-Based Insurance

Usage-based insurance uses information gathered via a GPS unit, cell phone, or telematics device installed on your car to help determine how you are using your car and rate you accordingly. This has a variety of potential benefits.

Good drivers will get discounts.

A telematics system that records your driving habits can help those who are good, safe drivers to get more immediate savings without having to spend years creating a log of historical data. Traditional insurance rating systems rely on statistics and past information about your driving record, but usage-based insurance provides current and ongoing information and can use it to see that the best drivers get the discounts they deserve.

Insurance rates will reflect current driving habits.

Usage-base insurance uses the most current information on how far and how frequently you are driving. This means that if you have a change in your driving habits it can be reflected more quickly. If you’re driving less, you may see that change in your rates in a shorter timeframe.

Recording of driving habits could encourage better drivers.

A system that records how often you brake hard, turn too sharply, speed, or other signs of bad driving habits has the potential to encourage drivers to adopt better habits, since there’s a potential reward for having those good habits recorded – discounts. This in turn means the insurance companies could be paying out on fewer accident claims, resulting in fewer expenses and lower rates across the board for drivers.

Accident investigation could be easier.

Having the moments leading up to an accident recorded in terms of the speed and direction the car was travelling, as well as hard braking and airbag deployment, can all help accident investigators get a clearer picture of how the accident happened and what caused it. It could also help insurance companies to catch fraudulent claimants. Again, the savings from fewer fraudulent claims and more accurate claims investigation would have an impact on rates.

Potential Drawbacks of Usage-Based Insurance

Systems are expensive to implement.

The initial cost of getting usage-based insurance programs up and running may eat up some of the savings, at least in the beginning. Purchasing and installing telematics in customer cars would be a costly endeavor, and one that would take a while to see profits. Because the programs are voluntary, the overall cost is difficult to determine.

Concerns with privacy.

One of the major potential drawbacks of a usage-based system is the concern about customer privacy. Since some of these systems record everywhere you drive your car, there is a great deal of question as to how this information might be used. Insurance companies must ensure that the use of the information meets with the privacy legislation in the province.

Interpretation of information could be an issue.

While the systems will record certain specific pieces of information, there are certain details that can’t be recorded. For example, if hard braking is recorded, extenuating circumstances such as a child running into the road will not be a part of the gathered information. Distances driven can be recorded, but not the type of roads on which those distances were driven. These details will likely take a while to work out, and most won’t have a direct impact on how rates are determined.

The Bottom Line

Overall, in places where usage-based insurance has been implemented, drivers have seen a decrease in their insurance rates, of up to 25%. It seems likely that most of the potential drawbacks of the programs will be worked out satisfactorily for both drivers and insurance companies in the next few years. With the sharing of information and automation of systems becoming more and more the norm, usage-based insurance will likely turn out to be more beneficial than harmful to insurance and drivers.

  • Groona Yablonski

    All businesses, insurance included, want to maximize profits and minimize risk. Telemetrics, as a basis for establishing risk, will also serve to provide insurers with rational to decline a claim or dump the driver as too high risk, despite a good driving track record. As with credit risk, the best predictor of future behaviour is past behaviour. While telemetrics might be a viable means of controlling driving behaviour for new or high risk drivers, it is a total invasion of privacy for those who have established themselves as low risk. I am a skilled driver who has taken several high performance driving courses, driven competitively and I enjoy a twisty road. My driving style is likely to raise a red flag with telemetric analysis. I enjoy low insurance rates now because I have not had a ticket or accident, or claim in over 20 years. I do not believe my record is a result of good luck. I see moronic moves every day on the street, that would not likely raise an alert with telemetrics. Running red lights and yellows would not show up. Failure come to a complete stop at an intersection, wandering in a lane or failure to signal would not be flagged.
    Telemetrics will only help insurance companies mitigate the legislated loss of profit caused by reducing their profits to normal levels.
    I’ll move to a new jurisdiction before I’ll have one of these invasive devices in my car!