Telematics and car insurance: what is it, and what are the benefits?

When the first car insurance policies were provided in the last years of the 1800’s, its originators likely didn’t anticipate just how big of a role technology would eventually play in them. The 20th century had its fair share of technological marvels when it came to vehicles, those are well known, but telematics—where data facilitated by GPS technology impacts car insurance rates—wasn’t introduced until the 1990’s.

Here’s a fuller look into how telematics are being used in the insurance industry, why that can be a good thing, and the potential pitfalls of widespread adoption of telematics.

What is telematics?

If actuarial science is the mathematical discipline of determining someone’s risk profile, telematics is kind of like a cheat sheet. It gives companies specific insight to a unique customer’s driving habits, like how fast they accelerate or how controlled they are around turns.

Telematics in the auto insurance industry can be used in corporate or business settings and are also integrated into usage-based insurance (UBI) rates or pay-what-you-drive programs.
Technology usually takes the form of an app on your phone and/or a “black box” style device under the hood, depending on your province.

Telematics systems allow insurance companies to calculate your discount based on your driving habits, such as how fast you drive and how sharply you turn or brake, as well as your signalling habits. It also factors in how often you drive. Depending on their kilometres driven, drivers can save up to 60% by switching to UBI.

However, some users may get dinged if they prove risker than previously assumed.

Historically, actuarial scientists have used demographic information as a key indicator to calculate rates. However, this leaves a lot out and is prone to bias.

The additional access to data offered by telematics, like when someone drives and how they drive, allows these companies to make better informed decisions about your rates. This information is also combined with other factors, such as driving record, age and location, and car make and model to derive an appropriate insurance premium.  

Related: This is how the car you drive affects your insurance rate

However, not all provinces allow usage-based insurance rates so check with your broker if you’re interested in using UBI to save money.

Should you opt for telematics?

On the scale of insurance products, telematics is still in its early days. As previously hinted, there are potentially grave implications for industries that rely on this technology in their operations. Professionals where transportation is part of their jobs, like long haul truck driving and product delivery for big ecommerce giants, are often monitored via telematics.

These drivers can be punished for offences that show up in the data – even if those “offences” are actually a result of bugs in the algorithm, or trouble keeping up with increasingly punishing delivery schedules.  

As for regular consumers, there is concern that privacy is reduced when telematics devices are used. The Insurance Brokers Association of Canada first raised the flag on this subject in 2013, but public opinion is split. Some commenters have labelled this fear as over the top, given that all the data collected falls under Canada’s strict privacy laws, while others feel uncomfortable with being monitored and judged whenever they are behind the wheel.  

U.S.-based Consumer Reports has also noticed a troubling trend whereby some of the rules set by telematics programs penalize people for habits such as driving late from an overnight shift at work – a group disproportionately comprising low-income and Black and Latino workers.

However, the promise of lower rates and more personalized service is starting to appeal to younger drivers. A recent international survey—which included Canadians—found that more than half of policy holders are at least willing to entertain participating in telematics offerings, with millennial and Generation X drivers the most likely to recommend the technology to others.

Insurance brokers in Canada have also made the argument that the advantages of telematics in insurance aren’t just about your wallet. Their argument is that in addition to enabling better driving habits, the data helps insurers more thoroughly investigate collisions and settle claims faster.

Read more: How traffic convictions and collisions impact your auto insurance rate

Getting started on telematics

If you’ve decided that telematics and, by extension, usage-based insurance is right for you, your first step should be to shop around.

In 2020, the Financial Services Regulatory Authority of Ontario released new guidelines to further incentivize savings for good driving habits while allowing insurers to charge more for unsafe driving. Plus, with the shift towards app-based solutions, the initial costs of these programs will vary.

But just like with any growing sector, the long-term impacts of telematics and UBI remain to be seen.