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Good drivers still paying for the bad ones

In high school, I used to spring from my desk at the sound of the last bell like a sprinter out of starting blocks. It would be agony if the teacher held us back, even for a minute, and its was particularly annoying when one person's antics earned a class detention and we all had to stay late.

You know, it's a lot like the feeling you get when your auto insurance premiums jump by double digits even though you didn't get into any accidents or get any tickets.

There are many factors that affect the price of your policy, some of which can be traced directly to you, and others that cannot. Clearly, getting into an accident or having multiple speeding tickets earns you a fat premium increase. Getting older or living farther away from an urban centre generally leads to a decrease.

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Or, as some have been finding recently, less of an increase.

Very generally speaking, insurers collect small premiums from all drivers to cover the large expenses of claims of some drivers, plus profit for the insurance company. This spreads out the risk and is generally a good system.

But there is more to it. The number of claims paid out every year changes, as does the value of those claims. Excess premiums are invested and the rate of return on those investments can also affect premiums. If the markets have been doing poorly, premiums can increase. If the markets do well, premiums could actually decrease.

But right now, insurance company investment portfolios have got beaten up by the horrendous market performance over the past few years. The calculation of premiums factors in the future prospects of these portfolios and, given the low interest rates and the expectation of slow market growth, a broad decrease in premiums doesn't seem likely soon.

Rampant fraud, exemplified by the arrest of 37 people in Ontario two weeks ago as part of Project Whiplash, a crackdown on auto insurance scams, also adds to everyone's cost. The estimates that 15 per cent of the premiums paid for all kinds of insurance by Canadians goes toward paying fraudulent claims and related costs that total billions of dollars annually.

So where do we go from here? Possibly to distance- or behaviour-based auto insurance. As Joanne Will noted in , "We can pay by the second for cellphone use and purchase videos on demand, so really, how far-fetched is behaviour-based auto insurance?"

Ms. Will pointed to the successful Ontario pilot project that ran from 2005 to 2010 in which a small device was plugged into a car's computer to record driving habits such as distance, speed and time of day. Drivers who submitted their data earned an average discount of 19 per cent on their premiums for the subsequent insurance period.

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I imagine it's only a matter of time before this option becomes more readily available. While premiums will still be affected by variables we can't control, at least with this option the good kids won't have to bear the full brunt of extra premiums because they were lumped in with the troublemakers.

Preet Banerjee, B.Sc, FMA, DMS, FCSI, is a W Network Money Expert, and blogs at . You can also follow him on twitter at

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About the Author
Personal Finance columnist

Preet Banerjee is a consultant to the financial services industry. You can follow him on twitter at  @PreetBanerjee. You can find his conflict of interest disclosure on his website. More

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