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Usage-based insurance (UBI) is type of car insurance that utilizes telematics technology in order to provide a more accurate personalized data-driven pricing. Telematics is the merger between informatics (the use of data to solve problems) and telecommunications (the exchange of information through wire, radio, or optical systems), this combination of technology allows an insurance company to track your daily driving behaviour in order to provide you with a dynamic price based on your assessed profile. It can have both a positive and negative impact on your premium.

Most companies offer an initial discount for signing-up that will be reflected in your auto insurance quote, in order to keep this discount or increase it's value you will need to exhibit safe driving behaviour throughout the assessment period. The initial period of assessment will vary by provider, but around 6 months is generally the industry standard. It's important to understand that with telematics, your assessment never ends and discounts can be adjusted further over time to better reflect your evolving driving profile.

In order to opt-in to a usage-based insurance program it requires either a telematics device installed inside a vehicle or via an app on your smartphone. Most companies have transitioned to an app based program. Both systems measure your driving behaviour data like acceleration, turns, distance travelled, and braking. That data is shared with your insurance company to prove that you are consistently a good driver, so that they can reward you with a cheaper car insurance premium.

Telematics devices began as a “black box” that was plugged into your cars’ computer system. While there were earlier commercial applications to manage fleets of trucks and expensive construction equipment, US personal auto insurer, Progressive, filed for a patent in 1996, receiving approval in 1998. 

Now, telematics, or what the personal auto insurance industry is calling ‘usage-based insurance’ can be done with an app on your smartphone making it much more accessible to the masses. This app-based insurance began in Canada in 2013. Its popularity is surging in the US and Europe, and experts forecast the global automotive telematics market to grow 18% per year between 2018-2022. 

In Canada, there are 2 types of car insurance based on usage. Pay-as-you-drive (or pay-as-you-go) measures distance travelled. The other is pay-how-you-drive, which measures things like acceleration, turn handling, and braking. UBI is only used to reduce your premium, so you’re not penalized for a bad score, only rewarded for a good one. According to telematics.com, the average premium reduction is around 25%, but some carriers offer up to 30%.

UBI technology is being leveraged currently for two distinct policy types within the auto insurance industry. You have 'Pay-as-you-go' and 'Pay-how-you-drive', which both can result in more affordable auto insurance, but leverage telematics in a very different way in order to help you save.

Pay-As-You-Go Insurance

In 2018, CAA introduced their MyPace® pay-as-you-go insurance policy, or a pay-as-you-use your car insurance model. They ask all the usual questions like the make and model of your vehicle and your driving history, but they leave out how much driving you’ll be doing. For that, they’ll use a black box telematics device plugged into your car or an app to measure the distance you travel. 

While you pay a cheaper base rate than you otherwise would with a normal insurance policy, the more you drive, the costlier it becomes. In fact, CAA themselves says if you’re driving more than 12,000 km per year, this might not be the plan for you. They’re targeting drivers low milage drivers.

Pay-How-You-Drive Insurance

Pay-how-you-drive is the more traditional use case and requires either an installed telematics device or downloaded app on your smartphone. Instead of paying for distance, it measures your driving behaviour. A driver who breaks with enough time, and doesn’t speed, handles a turn gently, and limits their driving to off-peak hours, can see a reduction in their premium. 

It might also measure the location of your car at all times, a nice security benefit. It can also read the type of roads on which your travelling, your direction and speed prior to a collision, the force of impact in an accident, and report said collision to local authorities.