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Understanding Usage-Based Insurance in Canada

Usage-based insurance (UBI) leverages technology to give motorists more choice in how their auto insurance premiums are calculated

Usage-based insurance (UBI) leverages technology to give motorists more choice in how their auto insurance premiums are calculated. 

Usage-based insurance (UBI) has been available in Canada since 2013. While still a relatively new auto insurance solution, it has quickly been adopted by major carriers such as Intact, CAA, Co-operators, Desjardins, and others. Thanks to the growing popularity of UBI, more insurers are likely to follow suit with their own products. 

One of the reasons usage-based insurance is valued amongst drivers is that it gives them the opportunity to easily reduce their premiums. Many motorists welcome the idea of being able to have their premiums determined by how often they drive, as well as their driving behaviour. 

Because UBI uses technology-based driver data, it is a more personalized auto insurance solution that rewards good drivers with premium savings. Customers who have embraced UBI may see savings of up to 25 percent per policy term.

While a new concept in Canada, usage-based insurance has been widely available in other nations for some time, such as the U.S. and U.K. Those countries served as an ideal test bed for the integration of UBI and its functionality in the market. Variations have been made to UBI over the years, tweaking coverage to make it more efficient for insurers and customers. 

Usage, Insurance, Canada
Usage-based insurance (UBI) leverages technology to give motorists more choice in how their auto insurance premiums are calculated. Pixabay

There are two types of usage-based insurance available in Canada: pay-as-you-drive (also called pay-as-you-go) and pay-how-you-drive. While the latter is generally more readily available, both coverage types are becoming increasingly popular. 

Pay-How-You-Drive Insurance

Pay-how-you-drive insurance is the most common type of usage-based insurance and has been available in Canada since 2013. Traditionally, auto insurance providers have used very strict methods to calculate premium rates. Among those blunt methods were demographic information like location, age, gender, and the driver’s past record (violations, claims history, experience levels).

With these traditional methods, insurers could get a broad idea of risk level posed by the driver when on the road. Pay-how-you-drive usage-based insurance plans to be more dynamic and informative for insurers, giving them access to real-world driving data to calculate the risk. 

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To achieve that, the first step is installing a telematics device. This is a little black box that slots into a diagnostic port in the vehicle (usually located near the steering column). While a telematics device is usually around the size of a matchbox, it can gather a wealth of information on driving habits. It collects measurable driving behaviour such as:

  • Hard braking 
  • Rapid acceleration
  • Speeding
  • The time of day you typically drive
  • Where you drive
  • How much the vehicle is used (kilometres driven)

Data collected by the telematics device is transmitted to the insurance company through cellular networks. Armed with accurate individual data, auto insurance providers can make a more bespoke premium for the driver. 

For motorists who observe safe driving behaviours, the benefit of Pay-how-you-drive usage-based insurance is discounted auto insurance rates. 

Usage, Insurance, Canada
Usage-based insurance (UBI) has been available in Canada since 2013. Pixabay

Pay-As-You-Drive Insurance/Pay-As-You-Go Insurance

Pay-as-you-drive insurance (or pay-as-you-go insurance) is a less common type of UBI, and has only been available in Canada since July 2018 when CAA Insurance debuted a solution. 

As the name suggests, this type of usage-based insurance focuses on how much you drive. Customers are given a base rate premium that is based on traditional criteria like driving record, claims history, type of car, and demographics information. When the base rate is calculated, the insurer will name a price based on each 1,000 kilometres travelled in the vehicle. 

CAA Insurance is the only carrier that offers the solution currently. The company says pay-as-you-drive UBI is ideal for drivers who don’t use their vehicle frequently: 

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“[It] is ideal for the Monday to Friday public transit commuter who leaves their car at home, someone retired who likes to visit family on weekends, or motorists that drive under 9,000 kilometres [per year] due to their overall lifestyle.”

Like pay-as-how-drive UBI, the pay-as-you-drive solution requires the placement of a telematics device in the vehicle. Motorists can track the kilometres through an accompanying smartphone app.

Changing the Industry

In many ways, Canada’s journey with usage-based insurance is just starting and the market is still nascent, especially for pay-as-you-drive coverage. However, in the future it is likely more auto insurance companies will offer both types of UBI options. Technology is refining the accuracy of UBI and predictions that the model could replace traditional ways of calculating auto insurance are not without merit. 

Perhaps the most interesting thing about UBI in its infancy is that it seems to be working on several levels. One recent study from the UK, showed telematics-driven auto insurance results in safer driving behaviour, especially amongst young motorists. 

Young drivers have often been subject to among the highest auto insurance premiums because of the risk they pose. Looking at over 200 million miles of telematics data across insurers from young drivers since 2011, the report shows a 40 percent decrease in the risk of collision when a driver has UBI coverage. 

Usage-Based Insurance in Combination with Traditional Auto Insurance

Despite its potential to overhaul the premium calculation paradigm, UBI in Canada is not quite there yet. Certainly, traditional methods of determining auto insurance are still a viable option. At InsuranceHotline.com you can compare rates from both UBI policies and traditional auto insurance options to find the cheapest car insurance in Toronto




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