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U.S.-based Progressive Insurance offers a pay-as-you-drive insurance program in 39 states. A device the size of a garage-door opener is plugged into the on-board diagnostic port of a vehicle and monitors driving habits including distance, time of day and the frequency of sudden stops.

Lately I've seen TV ads from the United States that offer pay-as-you-drive insurance. How does this work? Is it a good idea? Is this available in Canada? – Javed in Aylmer, Ont.

I'm tempted to warn you about the perils of watching too much American television, but when it comes to the ads you've seen for usage-based auto insurance, our southern neighbours might just be on to something.

We can pay by the second for cellphone use and purchase videos on demand – so really, how far-fetched is distance-based auto insurance?

Statistical data helps insurers determine your level of risk for incurring a claim. We know that the more you drive the more likely you are to be involved in a major accident or minor fender bender, so why not reduce insurance fees for those who drive less?

Along with variables such as age, location and the type of car you drive, insurers and regulators point out that mileage is already an element in rating algorithms. The actual distance travelled by an individual, however, is not taken into account; an estimate might be made, and typically the only distinction is whether the majority of driving is for work or pleasure. A policy for someone clocking 30,000 kilometres annually may not be fair for a motorist who only drives 6,000 kilometres.

Mileage has historically been underweighted in determining rates because it wasn't easy for an insurer to verify how much a customer actually drove, but technology is changing that. Mileage can now be checked via tamper-proof odometers, electronic transponders and GPS.

U.S.-based Progressive Insurance, for example, offers a pay-as-you-drive insurance program in 39 states. A device the size of a garage-door opener is plugged into the on-board diagnostic port of a vehicle and monitors driving habits including distance, time of day and the frequency of sudden stops. A personalized car insurance discount of up to 30 per cent can be earned by those who drive less, in safer ways, and during safer times of day. Progressive says the average savings for customers who choose to participate in their optional program is 10 to 15 per cent, or $150 per year.

In Canada, each province is responsible for its own jurisdiction when it comes to automobile insurance. After turning over many stones, I have yet to find an organization in Canada offering usage-based auto insurance.

A pilot was conducted in Ontario by Aviva from 2005 to 2010, in co-operation with the Financial Services Commission of Ontario, which administers the Automobile Insurance Act in that province.

"We asked auto insurance customers to install a small device into a port that exists on the vast majority of cars, and that device collected information about how an individual drives. We were interested in how far, how fast, and the time of day they drove; we know these are all relevant in someone's risk of being in a collision," says Paul Fletcher, senior vice-president, strategy, at Aviva Canada.

About 6,000 customers participated in the Aviva pilot. Every six months they uploaded the data to their computers, and the level of discount they could earn (up to 30 per cent) was predicted. If satisfied with the result, they could submit the information to Aviva. Once the data was validated, a discount was processed on the customer's next period of insurance.

"It was an interesting exercise, and benefitted a significant number of our customers. For those who did submit the data, the average discount they were able to earn was about 19 per cent. The great thing about it was it had been earned, because it was based on the way they drove and the behaviours they have, so it was really about them as an individual. A number of people didn't submit their data, which suggested they wouldn't earn a discount, but those who did submit the information certainly benefitted, and the feedback was very positive," says Fletcher.

With such positive results, why hasn't this program been implemented?

"One of the challenges we learned through the program is it's not a simple thing to operationalize on a large scale, and it's quite an expensive program to run as an insurer. The little device that you install in the car comes with a price tag, and you have to create computer systems to manage the information flows. I believe, and I know our company believes, that at some point the technology costs will come down low enough such that a program like this is viable in Canada. We do believe it has a future and customer demand and acceptance will grow. One of the reasons we did the pilot was so that we understood all the issues and at the right time would be able to introduce a product that would be attractive to customers," says Fletcher.

A recent poll in Ontario by the Insurance Bureau of Canada found that the majority of Ontarians would be in favour of the option to choose between pay-as-you-drive and other currently available auto insurance policies. The pay-as-you-drive option was most popular among those who drive less than 10,000 km per year.

Most insurers say any change to their current offerings will depend on consumer demand. Transportation policy experts believe such an initiative could help reduce congestion, and accident rates.

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