The Canadian Bar Insurance Association
Personal Injury

Usage-based car insurance as refined discrimination

By Geoffroy Pavillet

Usage-based insurance, now being introduced in the insurance industry, is a form of refined discrimination, where drivers’ distance travelled and extent and frequency of hard braking and acceleration can affect a policyholder’s premium.

Following the lead of some American insurers, Canadian Underwriter reports that Desjardins is introducing usage-based car insurance in Ontario, using an onboard telematic device, and it plans to expand it shortly to the rest of Canada.

Canadians are used to seeing auto insurers calculate costs based on age, gender, vehicle, and driving record, which can occasionally lead to litigation, as illustrated by the Supreme Court’s 1995 Miron v. Tudel decision, which strikes the marriage discrimination against common-law partners claiming access to auto insurance coverage. However, the use of new surveillance technologies is allowing new risk parameters to emerge.

This strategy re-allocates risk and re-ranks beneficiaries, both within and outside of the insurance system.

Usage-based premiums place insurance companies at the top of the insurance system’s hierarchy of beneficiaries. It allows them to better align their insurance with risks. The reduction of underwriting risks can increase profits. In turn, this allows insurers, presumably, to offer cheaper rates to the public.

Among the insured, the primary beneficiaries are the “responsible” drivers, who stop subsidizing the frequent, fast and perhaps furious drivers. In fact, by discriminating more on mileage and speed, you discriminate less on age and gender. For example, a low-mileage teenage male who drives slowly and brakes gradually may now pay less, even if his behaviour is uncommon. According to the Canadian Underwriter article, Desjardins says “good” drivers may see their premiums go down by up to 25 per cent.

At the bottom of the insurance system, we find the losers, those who drive a lot and fast. Ironically, this may include careful drivers who don’t get into accidents. These high-risk drivers will pay a much greater share of the collective auto insurance burden, and at first glance, making them pay more seems both fair and effective.

Although switching to usage-based insurance is optional, it will gradually become the norm. Indeed, insuring involves pooling funds of a given group, so reduced premiums will inevitably attract more users over time. The market segmentation will ultimately penalize the “good” drivers who fail to elect this new usage-based system, because they will find themselves in an increasingly costly high-risk market segment.

Outside of the insurance system, society as a whole should gain greatly from drivers incited to drive both less and slower. The risk of pedestrians getting hit by a car will be reduced, and those who do get hit typically have less severe injuries when the speed upon impact is reduced.

In parallel, less driving and smoother driving decreases fuel consumption, which reduces pollution from gas emissions. These benefits are wonderful but should not let us ignore the downsides of usage-based car insurance outside of the system.

Usage-based insurance can only penalize high-risk drivers if they actually insure themselves.

In the US, a 2009 study by the Insurance Research Council found that the states with the highest unemployment or lowest per capita income typically have the highest rate of uninsured drivers (up to 28 per cent in Mississippi). This suggests that high-risk drivers confronted to higher premiums may simply take the risk of not insuring themselves. Although uninsured driving is illegal, weeding drivers out of the insurance system is a systemic risk that cannot be ignored, particularly when just like MP3 downloads or marijuana use, it can criminalize the behaviour of a large portion of the population.

High-risk drivers who fail to insure themselves also delegate the cost of their mistakes to taxpayers or victims. If an uninsured driver hits a pedestrian who has no access to car insurance of his own, the victim will be either left unassisted, or become a burden for tax payers (likely a combination of both). This allows insurers to privatize profits while socializing the losses outside of the system.

Another issue raised by usage-based insurance is privacy, as the driving data collected may end up serving an unintended purpose.

The Ontario’s Financial Services Commission has required that any driving data recorded by Desjardins’s proposed device not be used as commercial data. In theory, the safeguard is reasonable. In practice though, available data is rarely ignored (particularly if it can provide a financial advantage).

A driver’s behaviour may be of interest to third parties including other insurers (health or life insurance), potential employers or anyone looking to identify the reckless or reward the diligent. On May 23, Canada’s privacy commissioner Jennifer Stoddart released a paper entitled The Case for Reforming the Personal Information Protection and Electronic Documents Act. It notes that a 2001 law is not adapted to our 2013 privacy landscape, and indeed usage-based insurance illustrates her point well.

Privacy will also be lost most certainly through litigation. Lawyers can anticipate many undertakings for the production of the driving data in accident cases where liability is in dispute, and perhaps even motions to compel the production of one’s historical driving data.

Overall, usage-based car insurance is merely a symptom of the rise of a behaviour surveillance society, where insurers will subtly introduce technological tools that will modify behaviour. This raises fascinating and frightening legal issues around themes of discrimination, freedom of choice, privacy and public policy.

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