One 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.