Usage-based auto insurance policies are proving very popular in the U.K. and the U.S., and the optional coverage is being tried out in parts of Canada by some auto insurance companies.

Usage-based insurance is not an actual insurance policy but instead is a way for insurance companies to better tell how policy-holders drive and apply applicable insurance rate discounts as a result.

Auto insurance companies in the United States, for example, offer up to 30 percent reductions in auto insurance policies for policy-holders who volunteer to participate in the program.

Usage-based insurance is made possible by enabling insurers to electronically monitor how drivers use their vehicles, including when and where. Insurers obtain the information in several possible ways.

One method of obtaining information on driving habits and patterns is by installing electronic monitoring devices that resemble garage door openers on car dashes. Drivers upload the information each month so their insurers can assess driving times, habits and locations during the past month and apply any potential rate discounts.

Another method is for insurers to download information from onboard car computers on a monthly basis, or to access the data via vehicle computer communications systems. The kinds of information insurers use include where, when and how often they’re driven.

If policy-holders drive during peak traffic hours every day of the week, such as during work rush hours, the odds of receiving a discount is lessened. But if those peak traffic hours are avoided – as is 2 a.m.-driving, prime time for drunk-driving arrests and other alcohol-related incidents – discounts are more likely.

Another driving habit insurers monitor is how fast and far insured vehicles typically travel, and whether or not drivers engage in sudden or hard braking. Accelerating hard, exceeding speed limits and braking hard to slow down or stop can indicate a high-risk driving pattern—these motorists are not likely to receive any discounted insurance rates.

And the more miles racked up during a week of driving, the more likely insured vehicles will be involved in an accident, and the less likely insurers are to offer discounted insurance rates.

Auto insurance companies monitor driving patterns and usage only so they can offer discounts—no penalties are assessed via the electronic monitoring programs. Volunteering for electronic monitoring can only result in discounts being applied to policies.

Auto insurance companies continue to use standard underwriting principles when drawing up new policies, and policyholders who volunteer to participate in electronic monitoring programs can only have their rates reduced instead of raised.

In Canada, Desjardins Insurance in Quebec was the first to initiate usage-based insurance plans on a limited basis by offering a five-percent rate discount for those volunteering to participate and an up-to-15-percent discount based on driving data. The information is obtained from diagnostic ports of vehicles and then assessed.

Ontario officials might approve usage-based insurance in the province for 2014. In the United States, motorists have received an average 15-percent discount when participating in various usage-based insurance programs.