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Will Pay-As-You-Drive Ever Get Traction in Canada?

We have been posting on the use of telematics and Pay-As-You-Drive  (PAYD) or Usage Base Insurance (UBI) schemes for some time.  It seems clear that these plans are gaining traction with insurance providers and insurance customers in the UK, Europe, and the US, but not in Canada yet. Why is that? We’d like your thoughts.

Back in February, we noted reports from several analysts that indicated a tipping point had been reached in the US.  Recent information from Telematics Update seems to bear that out: insurers representing 50% of US auto insurance premium are either using or implementing PAYD schemes.

In addition, Verizon, the US telecommunications giant,  recently purchased Hughes Telematics at a substantial premium over book value.  Hughes Telematics manufactures the technology used by State Farm to collect and bundle vehicle data for its PAYD programme.  Tom Kavanaugh, director in the financial services practice at PwC, told Insurance&Technology that such investments by vendors will help stimulate PAYD programmes by large and mid-sized carriers.  “Encompassing the data management and analytics will absolutely help to accelerate some of the efforts, especially of your smaller regional players who don’t have the capital resources,” Kavanaugh said. conducted an informal poll earlier this year.  Three-quarters of respondents felt that UBI would be embraced in Canada within two years.  At the 25% mark, implementation announcements are scarce (Industrial Alliance is a notable) exception.

In the same poll, asked what the obstacles were.  Almost 50% of respondent felt that customer acceptance was a barrier.  However, a Pembina Institute study published in April 2012 found that two-thirds of Toronto drivers would try a UBI insurance scheme.

Now, there are reports that some of the major insurers are actively studying UBI,  and attendance at conferences discussing PAYD insurance has a good representation of Canadian actuaries and marketers.  However, there does not appear to be the groundswell found elsewhere.

So what are the issues?  Here are some thoughts:

  • Canada has a widely dispersed population with provincial jurisdiction over automobile insurance.  PAYD would add another layer of complications.
  • Internal systems would require substantial changes to accommodate the new data.  Many insurers are undergoing system transformations now, and would not have the cycles to take on additional work.
  • Rating based on PAYD requires several years of experience against a wide range of possible variables and there is no common data source to act as reference.
  • There is no set of competitors creating pressure.

We’d like your thoughts on two questions:

  1. Can Canada continue its current wait-and-see attitude?
  2. What would cause a change?




Dmitry Zaharov

Dear Sir/Madam,

Strangely, mentioned concerns like “experience”, “systems upgrade” and “complexity” were forgotten when Ontario legislated existing automobile rate system, the most complex in the world, with tremendous rate filing overhead, and large amount of factors non-correlated with claims amount paid.

Despite record complexity, it missed the main goal of insurance – prevent accidents by risk management – i.e. by improving driving habits.

At the same time, driving with a PAYD recorder easily achieves risk management, hence improving loss ratio.

Most companies strive to please the board or shareholders by increasing volumes and hiring more staff. Seemingly positive development feeds on directing free cash flow of creative individuals with good habits from small business innovation to paying for claims of ill-minded. This brings no development to the economy with long-term benefits for everyone.

From strategical point of view, PAYD is an absolute must for reducing claim amounts, improving economy competitiveness and ultimately to remain a prosperous country.

With deep respect,
Dmitry Zaharov.

Michael Harrison

A wait and see attitude will only delay the inevitable and place Canadian insurers in catch up mode. This ultimately will place the industry on the defensive and incur greater costs in implementing PAYD or UBI which is here to stay.

Now let’s get down to the real issue. One of the benefits of predictive modelling is the ability to cut distribution costs. Distribution costs means commissions, something insurers are afraid to discuss and brokers are afraid to consider. If brokers keep their head in the sand long enough the issue will be forced upon them and they will not participate in the shaping of nor the survival of their future. If the industry fails to step up to the plate now and begin to implement PAYD competition from outside will come in and do it for them.

Christine Haeberlin

We can always wait since our environment is highly regulated and privacy is esteemed thus discouraging action in a new direction. In this way the industry can avoid vigourous competition. However, with powerful, cost effective technologies such as IBM Netezza analytics to support a new business model for a new entrant and IBM SPSS predictive analytics to identify high risk drivers in commercial trucking – examples where telematics is in production – there are emerging opportunities. How we define the opportunity will cause a change. I define the opportunity as the insurance industry creating smarter cities and a smarter planet. That should cause a change.

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