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Usage-based insurance is a type of auto insurance that differs from traditional coverage by using your driving habits to determine the premiums you pay. There are two types of usage-based insurance: pay-as-you-go and pay-how-you-drive.
Pay-as-you-go usage-based car insurance
This form of usage-based car insurance ties your premiums directly to the amount your vehicle is used. There is a small daily premium, which you can think of as a retainer for the policy, plus an additional charge for every 1,000 km you drive.
Pay-as-you-go policies are a cost-efficient option for drivers who use their vehicles sparingly, but who don’t wish to take them off the road entirely.
Pay-how-you-drive usage-based insurance
This type of usage-based auto insurance uses onboard tracking technology to monitor driving habits and assess the level of risk posed by the driver(s). The premiums paid by the policyholder are determined by the driving habits they exhibit over time.
Whereas conventional car insurance policies rely heavily on demographics – e.g. your age bracket, location, gender, etc. – to determine your premiums, the premiums of pay-how-you-drive policies are determined directly by the individual performance of the driver. Though many of the factors that traditionally affect your premium still apply, a policyholder who exhibits safe driving habits will be eligible to receive a discount.
The most common factors that insurance companies use to determine the cost of a pay-how-you-drive usage-based auto insurance policy include:
The metrics used to determine your premium seem straightforward, but there are certain things unaccounted for. For example, you may have to slam on the breaks to avoid a collision caused by someone else’s poor driving. While this action is consistent with good, defensive driving, your telematics device would identify the action as unsafe.
While this example reveals the limitations of telematics, it’s noteworthy that ‘habits’ are defined as actions consistently taken over time. So even though telematics devices lack context when assessing performance, single events are unlikely to sway judgment in a considerable way. Motorists who consistently employ safe driving techniques will be eligible for auto insurance discounts.
Frequently asked questions about usage-based car insurance
Pay-how-you-drive policies offer drivers the opportunity to save by consistently demonstrating safe driving habits, as measured by performance in a handful of categories. This includes following the speed limit, accelerating and decelerating methodically, taking corners gently, and driving at times and in places where accidents occur infrequently. Pay-as-you-go policies simply measure how often you use your vehicle, and rise or fall accordingly.
A pay-as-you-go policy starts with a small base premium and increases with every 1,000 km driven. Pay-how-you-drive policies require that you build a track-record of performance. Because it takes time to set your baseline habits against what the insurance company deems to be average, it may take several months for your premiums to decline. However, some companies will offer discounts right off the bat to those who enroll in a telematics program. This upfront discount is usually in the 5-10% range.
Yes. Some car insurance companies allow you to download an app, which effectively makes your phone the onboard device. Others, especially those offering pay-as-you-go policies, require you to install a fixed device on board, which they will provide. In every case, some type of telematics device is needed to measure your driving performance and frequency.
It depends on where you live. In Ontario and Alberta, telematics cannot be used by insurance providers to justify increasing your premiums. At worst, you simply won’t receive a discount.
Telematics devices collect personal data, and any time this occurs there may be some concerns about privacy. Canadian insurance providers that offer usage-based car insurance maintain that your data will be used for internal assessment only. This means your data will not be shared with third parties. However, as with any other assemblage of personal information, the possibility of a hack uncovering your data does exist.
Yes and no. Premiums are traditionally determined by a variety of factors related to your vehicle, demographics and driving history. These factors are used by your insurance company to estimate how likely you are to make a claim. Certain individual events, like a ticket or an accident, may have a direct impact on your premiums. But otherwise, your premiums are largely determined by factors that are not easy to change, such as your postal code or the vehicle you drive.
Telematics, on the other hand, uses day-to-day data that’s unique to you as a driver.
To see which insurance providers in your province offer usage-based car insurance, start a quote on RATESDOTCA. You’ll be prompted to choose whether you’d like to be eligible for discounts based on your driving habits. Select ‘yes’ to see quotes from companies that offer usage-based insurance policies.
Usage-based insurance is available in Alberta, Ontario, New Brunswick and Nova Scotia.
Insurance companies mostly look at the same factors when determining the premiums of a usage-based auto insurance policy. These factors include adherence to the speed limit, acceleration, deceleration, phone usage and vehicle usage. But while the criteria are the same, there is no standardized weighting for each factor. In other words, two drivers with the exact same performance metrics might pay different premiums if they are insured by different companies.
While even standard car insurance policies consider how many kilometres a vehicle tallies over the course of a year, driving less, or barely driving at all, is most cost-effective for drivers with a pay-as-you-go policy. For example, if you find that you’ve hardly been using your car during the COVID-19 pandemic, switching from traditional insurance coverage to a pay-as-you-go policy will almost certainly reduce your premiums.
Most people can benefit from a usage-based insurance policy, as simply signing up can be enough to earn a discount. Drivers who exemplify safe driving habits will benefit the most, as establishing a track-record of caution and safety will unlock further discounts. If you’re confident in your ability to drive cautiously, switching to this type of usage-based auto insurance coverage is likely a good idea.