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Usage-Based Insurance: What it is, How it Works

November 13, 2013

Car keys on insurance documentsOne of the latest advances in the insurance industry is a new approach to rating that is known as usage-based insurance. While it’s already seeing some use in The U.S. and the U.K., only a few select Canadian insurers have started offering it on an optional basis. If the programs are successful, odds are good the system could become more widespread, so it’s a good time to get a grasp of the basics of usage-based insurance.

What is Usage-Based Insurance?

Usage-based insurance is a new type of policy that bases your insurance rates on your actual driving habits rather than on the traditional rating methods most insurance companies use. Your premiums are calculated based on the actual miles you drive, how often you drive, and habits such as how often you brake hard. This information is transmitted to the insurance company via a small device that is placed on the car to record how fast you drive, where you drive, how frequently you drive, the number of miles and such habits as braking and turning. This information is then used to determine how much you should pay for insurance. This is voluntary. You do not have to agree to have a device in your vehicle.

Traditional Rating Vs. Usage-Based Rating

Traditional methods of determining insurance rates use statistics and information provided by the driver in order to determine a risk level for that car and driver. Some of the factors that go into the traditional rating system are how often you commute and how far, where you live, your driving record, and the type of car you drive. All of these things and more are used to determine what the likelihood is of you having a claim against the policy, and you are charged accordingly. Information regarding commuting frequency and distance and other car usage factors is provided by the driver, which can make it somewhat inaccurate. A system of tracking actual miles driven can provide more accurate information, which leads to the ability to rate more accurately.

How Usage-Based Insurance Works

Although usage-based insurance could have a big impact on rating systems, some of the traditional rating methods will still apply. The information gleaned from the telecommunication device in your car would be used in conjunction with traditional rating factors to create a more personal approach to determining premiums. While some historical data and statistical information would still apply- the type of car you drive will still impact rates – your current driving behaviour will impact your rates and not just past driving behaviour. Usage-based insurance allows for your rates to reflect the changing nature of your driving habits over time and create a more fluid and individual pricing system.

How Information is Gathered

While early usage-based insurance systems used GPS or cell phone based applications to gather data, the system has now advanced to using a special telecommunication device, known as telematics, to transmit information regarding driving habits. This device is attached to the car and can record everything from where you have driven to the deployment of the airbags in the car. The device isn’t noticeable and doesn’t require the driver to do anything.

How Usage-Based Insurance Rates Are Calculated

There are a few ways for the usage information gleaned from the telematics to be applied to the rating system. Among them are simple rate adjustments based on how many kilometers you drive on a daily basis, and the good driver discounts for those who have few hard stops or turns recorded, indicating they are driving safely and smoothly. Some systems may use a combination of these options to work out rates. This information is then combined with the traditional rating system to come up with your premiums. Some usage-based insurance policies use a pay as you go system that does not set a yearly premium but instead allows you to pay a rate that is billed in response to your most recent usage. Usage-based insurance rates will still be affected by things like tickets or accidents on your record, in the same way that they do on traditional insurance policies.

Usage-Based Insurance in Canada

This type of insurance is till very new, especially in Canada. A few select insurers offer this type of policy on an optional basis to their customers, but as it grows in popularity and becomes easier to implement it’s likely that drivers across Canada could see some form of usage-based insurance being offered in the near future.

  • john doe

    Big Brother

  • Anonymous

    The article does not deal with downside of what they call
    usage based insurance, such as misuse of information and privacy, equipment
    malfunction and dispute resolution. I understand that these gadget
    operate much the same as a GPS unit and can track where you drive. The
    system is Eerily reminiscent of big brother, watching one’s every move. I
    actually see only a benefit for insurance companies and really not much for
    drivers, since they will still be able to tack on traditional methods of assessment.

  • Agooddriverthanksforasking

    How long will it take before they start increasing rates for those who choose not to have one of these gizmos because they claim you’re a greater risk because you might be driving like a maniac?? Once the participation rate reaches 1/3 you will see rates incease to force everyone to “voluntarily” have these installed! This only benefits the insurance companies.

  • TailoredReaction

    This is complete BS. I filled in an application for Usage Based Insurance and it spewed out an insurance quote that was 25% higher than the high rate that I was already paying, but explained that with “good” driving habits, I could reduce this inflated figure by as much as 15%, thus ‘only’ increasing my rate by 10%.! I drive very little, not even once a week, usually two or three small trips to stores/malls etc per month. I also choose to drive when traffic is light, rarely venturing out during rush hours. Insurance companies know there are hundreds of thousands of consumers like me making noise with our provincial govenments to significantly reduce rates for those of us who value our independence by owning a car, but shouldn’t be paying insurance for the most of the time we are not out driving. In three months I pay approximately $336 of car insurance to drive less than 500 kilometers using $60 worth of gasoline!

  • http://www.insurancehotline.com/ InsuranceHotline.com

    Hello George,

    This is something to discuss with your insurance broker/agent directly to see what your options are as each insurance company is different.

  • http://www.insurancehotline.com/ InsuranceHotline.com

    Hello Guessagain,

    Thank you for your input. There are so many factors and variables in each province… I’m not sure there is an answer we can give you for this question!

  • Brian

    So if I decide to take a long uncommon trip across the country for a vacation, would the usage based system misjudge me as a very active driver and charge me a higher premium because of that? What about hard braking? If I slam on the brakes to avoid going through red lights a few times, will it know that I slammed on the brakes for a good reason?

  • http://www.insurancehotline.com/ InsuranceHotline.com

    Hi Brian,

    These are great questions, and similar to many other questions we receive from consumers. Currently, usage based car insurance is only going to work to your benefit by rewarding you for good driving habits… it is best to speak directly with your insurance professional to find out the different policies that are available for your profile from the companies who are offering this discount.

  • anon.idought

    Stick this plan of control where the sun don’t shine. We have enough fascist rules to live by as it is. Ontarians must pull their heads out of their **** and start fighting back. If we don’t then millions will have died fighting fascism in the forties. I have already experienced a law that severely punished me, cost a bucket full of money. I received no charges because I did not commit a crime and so was denied any defence. Program is just another way government can sleep with business to control the people. FASCISM!!! Our for fathers killed and died to protect us from this. What should we do. Live on our Knees. I would rather die on my feet. Now they want my e-mail address. Can I not just make my opinion heard without being tracked. Will I be punished for what I am saying. Probably.

  • Edgar Barrington

    Stop throwing around incoherent phrases such as “Fascism” when we, the public, are struggling to pay exorbitant insurance premiums. Maybe, you should get half a brain! Keep your f***ing email address – you are not that valuable to the rest of us! We will keep the savings. This proposal sounds good to me. Maybe, you don’t drive very well!

  • Edgar Barrington

    Only the guilty will come out fighting with a cacophony of unreasonable, illogical, unrelated arguments. If you drive decent, you have nothing to fear!

    To the insurance companies – bring it on!

  • Edgar Barrington

    Hmmm…in which case, all is not working the way it should. They better get their act together before rolling it out!

  • Edgar Barrington

    We better be able to – if it does not suit us!

  • Edgar Barrington

    What guarantee is there that after the device is placed in our vehicle and we drive carefully, doing all the right things, that our rates will not go up suddenly, for no reason? Can the device be removed and the rates be rolled back?

  • perfectcritic

    Come to BC and you would end up paying $600 for same 3 month period for a car which is atleast 8 years old and almost 0 residual value. If you got a new car then add 100 bucks more.

  • perfectcritic

    Come to BC and you would end up paying $600 for same 3 month period for a
    car which is atleast 8 years old and almost 0 residual value. If you
    got a new car then add 300 bucks more.

  • Fran

    I just got an email from Intact to say they want the device back as my assessment period is over. I will get a 13% discount which is good but I didn’t know I wouldn’t have the chance to continue improving my driving. I believe I’ve had it for a year.

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