Commentary

Time for Pay As You Drive Insurance in Ontario

Let's not let auto insurance concessions in the Ontario budget 'collide' with our goals to reduce gridlock.

By Cherise Burda
Published May 01, 2013

For the Wynne government to pass its first budget, it may have to consider some policies demanded by the NDP, including rolling back auto insurance premiums by 15 per cent. While insurance rates are higher in Ontario than in some other provinces, there are better policy solutions to offer drivers a break without undermining other key government priorities - namely reducing congestion in the GTA.

The congestion battle goes beyond building transit. It must include complementary policies like better urban planning and thoughtful "carrots" for commuters to encourage less driving, not an across-the-board subsidy to encourage more.

One such incentive that can reduce costs is "pay as you drive insurance" (PAYD), which charges drivers by the distance they drive. Extensive research has found this to be one of the most effective methods of decreasing vehicle kilometres traveled (the total amount of driving in a given area) and promoting a shift from auto to transit, carpooling or active transportation, and even telecommuting.

The program rewards driving reductions with lower insurance costs, and makes it more cost-effective for drivers to invest in other modes, be it a transit pass, carpooling or a bicycle, by freeing up part of their transportation budget.

In a survey conducted by the Pembina Institute last year, two-thirds of GTA drivers indicated they would likely try "pay as you drive" (PAYD) auto insurance if it were available, and of these, 85 per cent would change their commuting habits to find some other way to get to work if they had PAYD.

In Motion Elsewhere

PAYD insurance is used in the U.S., Europe and around the world [PDF]. In the U.S., for example, Progressive Insurance offers optional pay-as-you-drive insurance in 39 states, with an average savings for customers of 10 to 15 per cent.

And it's effective in reducing driving - one U.S. study demonstrated that a charge of $0.06 per kilometre would reduce distances driven by 10 per cent.

A Brookings Institution study from 2008 found that under PAYD insurance, driving distances would be reduce by 8 per cent while almost two-thirds of households would pay less for auto insurance - saving an average of $270 US per year.

PAYD insurance is not currently available in Canada, although Aviva Insurance in Ontario offered a pilot program from 2005 to 2010; 6000 Ontarians participated with an average savings of 19 per cent.

While it was introduced primarily as a method of collecting behavioural data such as speed, distance and time of day of driving to assess individual accident risk, a survey by the Insurance Bureau of Canada showed that a permanent program of this type would be favoured by the majority of Ontarians; it would (as expected) be most popular among those who drive less than 10,000 km per year.

A 2008 survey of North American insurers showed that 70 per cent of companies already offer, are considering testing, or are planning to offer PAYD pricing. The survey found the top market driver was competitiveness followed by exercising corporate responsibility with a "green" product. Furthermore, technology available now resolves the privacy concerns of various tracking devices.

Short-Term Gain for Long-Term Gain

Reducing congestion is one of many benefits to reducing travel distances through PAYD insurance. Others include reducing accidents and improving insurance affordability with premiums better reflecting a vehicle's accident exposure.

Currently, mileage is not effectively accounted for when determining insurance rates, aside from the distinction of usage of the vehicle for work or pleasure.

PAYD insurance would be even more attractive with additional incentives to help commuters spend less time behind the wheel.

The same Pembina survey found that 94 per cent of drivers would be interested in telecommuting if offered by their employer, 63 per cent would be likely to trade their employee parking spot for cash and find another way to get to work if a parking cash-out program were available, and over 60 per cent of drivers would consider carpooling if there were an added incentive to do so, such as flexible work hours or a financial incentive.

Survey response: 'How likely would you bee to take advantage of these options if they were offered?' (Drivers' Choice, The Pembina Institute, 2012)
Survey response: 'How likely would you bee to take advantage of these options if they were offered?' (Drivers' Choice, The Pembina Institute, 2012)

So while we wait for transit expansion to be built, our political parties should champion a variety of solutions that can provide drivers with options and start to chip away at gridlock now.

First published in the Pembina Institute blog.

Cherise Burda directs research and implementation strategies for transportation solutions in Canada, including policy initiatives for urban form. In addition to her role as transportation director, Cherise leads the Pembina Institute's Ontario policy program, focusing on research to advance renewable energy solutions, and is a regular spokesperson on transportation, renewable energy and Ontario policy issues.

Since joining the Institute in 2007, Cherise has written dozens of energy, transportation and urban development publications, including: Behind the Wheel, Live Where You Go, Making Tracks to Torontonians, the RBC-Pembina Home Location Survey, and Plugging Ontario into a Green Future.

Cherise's 17-year career as a policy specialist and senior manager includes past experience as a program director with the David Suzuki Foundation and a senior researcher with the Polis Institute at University of Victoria's Faculty of Law.

Follow her on twitter @CheriseBurda.

18 Comments

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By Conrad664 (registered) | Posted May 01, 2013 at 13:19:40

Well guesse were im going after work trans my ins to Aviva

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By hshields (registered) - website | Posted May 01, 2013 at 14:01:25

Great post Cherise! I think this idea, and many other innovative ideas that uses market forces to direct more sustainable transportation, are great. I don't think this poses an obstacle or is a counterpoint to the NDP demand for a reduction in premiums to a market that has seen benefits slashed and those savings haven't been passed on to the consumers. I think this idea is complimentary and reinforces the idea that auto insurance and how we transport our people and goods needs innovative thinking. I think this post should get people thinking that there are so many more issues that go into making decisions on how we move people and goods, when we move them and how we finance it all. Well done!

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By trucking question (anonymous) | Posted May 01, 2013 at 15:44:58

How would this work for those who live by driving? taxi drivers, moving vans, traansport (both independant and corporate), some salespeople etc? their livelyhoods depend on driving and many are not exactly rolling in a lot of money especially considering fuel etc. I can see how it could work for personal transportation.

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By Ogus (anonymous) | Posted May 01, 2013 at 20:51:48 in reply to Comment 88299

You would lose your shirt, that's the point of this program to reward those who drive little and get more from those who drive a lot.

Just like Gasoline

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By RUSirius (anonymous) | Posted May 02, 2013 at 02:20:46 in reply to Comment 88316

Yeah, I mean what kind of communist would say people who use more of something should pay more?

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By Ryan (registered) - website | Posted May 01, 2013 at 15:50:57 in reply to Comment 88299

People who drive professionally already fall under commercial auto insurance, which is different than personal auto insurance.

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By Who (anonymous) | Posted May 01, 2013 at 18:49:28 in reply to Comment 88300

For commercial vehicles yes, but many (like me) are required to use their personally owned and insured vehicles for work.

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By Insurance Broker (anonymous) | Posted May 02, 2013 at 02:16:32 in reply to Comment 88308

If you are using your personal vehicle for work and your insurance company knows, you will pay a higher rate. If you didn't tell them and then get in a collision while on a work related drive, the penalty may be quite serious. That is to say, you should already be paying more. If you're not, it means you're cheating. Anyway, if your job requires you to drive your personal vehicle, that should be reflected in your income.

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By banned user (anonymous) | Posted May 01, 2013 at 19:08:26

comment from banned user deleted

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By Gored (anonymous) | Posted May 01, 2013 at 19:15:50 in reply to Comment 88310

I read the article. Then your comment. Then the article again. Then your comment again. And I give up.

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By g (anonymous) | Posted May 02, 2013 at 02:40:21

i think it would be interesting to simplify insurance by including the premium in the price of a litre of gas or diesel. drive more, pay more. if you start getting into accidents you pay a surcharge when you renew your license. speeding tickets etc. would simply be increased to reflect the impact on insurance premiums. it would reward drivers who drive less and show drivers a closer estimate of the real cost of driving in ontario.

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By pete (anonymous) | Posted May 02, 2013 at 04:59:58

I work in Milton, I work at night, there is no alternative for me to get there. There are no comparable jobs close to home for a comparable wage. I have a good driving record. Why should I have to pay more?

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By Ogus (anonymous) | Posted May 02, 2013 at 11:48:55 in reply to Comment 88325

Driving after midnight is 5 times as dangerous as driving during daylight.

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By ScreamingViking (registered) | Posted May 02, 2013 at 08:39:59

I think it is an interesting concept. But there are some things to consider. For example, a couple of thoughts...

  • Where I drive, not just how much, influences risk of a claim and therefore the rates I should pay
    • A 10% drop in driving distance in the GTA might be associated with a larger risk reduction than would a 10% drop in driving distance in more rural parts of the province (and I recognize that people in certain areas may not be able to cut back on their driving as much)
    • Would insurance companies try to account for this? They're good at rating premiums based on risks associated with where people live, so there's an argument for rating them based on where people drive too.
      • We're probably talking about GPS tracking technology though, and that will cost money (and likely create discomfort among some drivers)
  • We have to keep in mind that under Ontario's system, insurance companies are corporate, and do have a profit motivation
    • If average km driven does drop, risk will be reduced and presumably save companies money on payouts for claims, which they can pass along to customers - this is the reason drivers can save money by driving less
    • If average km driven does drop, what will happen if the associated drop in payouts combined with reductions in premiums cuts too deeply into corporate profits? Will that mean the rate reductions will not last long? Will high-km drivers face massive increases in their rates to compensate?

Forgive the cynicism, but those will be real concerns, and there are probably more.

Many people pay a lot of money for insurance, while never (or rarely) filing a claim, yet they end up paying more and more because of factors beyond their control. Unless this kind of system is context specific and there is some reasonable expectation of a long-lasting benefit for cutting back on driving, I think it will be viewed with skepticism.

Comment edited by ScreamingViking on 2013-05-02 08:50:39

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By Ogus (anonymous) | Posted May 02, 2013 at 11:56:44

What the writer does not know is that Aviva lost their shirt during their PAYD experiment. They knew within 18 months that they`d made a mistake in how they deployed the technology and marketed it. This concept is a great one but for it to work, you cannot just reward drivers with low mileage etc.., it must be balanced with higher premiums for those who drive a lot.

The problem comes in that those to who would pay more stay away. So an insurer would only end up lowering their overall revenue without changing the amount of risk they insure.

Even in the USA, Progressive Insurance, the world leader in using technology for insurance purposes, has struggled to make this concept work.

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By Ryan (registered) - website | Posted May 02, 2013 at 12:03:58 in reply to Comment 88329

The way to get around the insurance death spiral is to mandate that everyone participates.

Comment edited by administrator Ryan on 2013-05-02 12:04:14

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By ScreamingViking (registered) | Posted May 02, 2013 at 18:07:34 in reply to Comment 88330

In that scenario, given competition in the industry, it's likely that the government would also have to mandate that all companies participate, using exactly the same rules. Create a level playing field, because some could institute the system more easily than others, and there might end up being slight variations between companies depending on how they evaluate their own risk/revenue equation.

So we might be talking about a public insurance system for this to work.

I'm not for or against that, just pointing out the possibility of a major change in the system.

Comment edited by ScreamingViking on 2013-05-02 18:12:05

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By car care (anonymous) | Posted May 03, 2013 at 02:42:29

should people who are more likely to incur significant health car costs pay more for their health insurance in ontario? smokers? heavy drinkers? those with chronic illnesses? older people?

why not? those who are statistically more at risk pay more for auto insurance.

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