Pay As You Drive (PAYD) Insurance

Pay as you go insurance  or Insurance by the mile  is based on usage, that is to say, it only accounts for the miles you drive. In this situation, the costs of motor insurance are dependent upon type of vehicle used, measured against Time, Distance and Place.

This differs from traditional insurance, which attempts to differentiate and reward "safe" drivers, giving them lower premiums and/or a no-claims bonus. However, conventional differentiation is a reflection of past history rather than present patterns of behaviour. This means that it may take a long time before safer (or more reckless) patterns of driving and changes in lifestyle feed through into premiums.

How Pay As You Go Insurance Works

The simplest form of usage based insurance bases the insurance costs simply on the number of miles driven. However, the general concept of Pay As You Drive or Insurance Per Mile  includes any scheme where the insurance costs may depend not just on how much you drive but how, where and when you drive.

Pay as you go car insurance means that the insurance premium is calculated dynamically, typically according to the amount you drive.

There are three types of usage based insurance:

1. Coverage is based on the odometer reading of the vehicle.
2. Coverage is based on the number of minutes the vehicle is being used as recorded by a vehicle-independent module transmitting data via cellphone or RF technology.
3. Coverage is based on other data collected from the vehicle, including speed and time-of-day information in addition to distance or time travelled.

The formula can be a simple function of the number of miles you drive, or can vary according to the type of driving or the identity of the driver. Once the basic scheme is in place, it is possible to add further details, such as an extra risk premium if someone drives too long without a break, uses their mobile phone while driving, or travels at an excessive speed.

Telematic usage based insurance (i.e. the latter two types, in which vehicle information is automatically transmitted to the system) provides a much more immediate feedback loop to the driver, by changing the cost of insurance dynamically with a change of risk, and this means drivers have a stronger incentive to adopt safer practices.

For example if a commuter switches to public transport or working at home, this immediately reduces the risk of rush-hour accidents. With pay as you drive auto insurance insurance, this reduction would be immediately reflected in the cost of car insurance for that month.

Potential Advantages Of Pay As You Go Insurance

1. Social and environmental benefits from more responsible and less unnecessary driving.
2. Commercial benefits to the insurance company from better alignment of insurance with actual risk. Improved customer segmentation.
   Potential cost-savings for responsible customers.
3. More choice for consumers on type of car insurance available to buy.
4. Social benefits from accessibility to affordable insurance for young drivers – rather than paying for irresponsible peers, with this type of insurance young drivers pay for how they drive.
5. Higher-risk drivers pay most per use, thus have highest incentive to change driving patterns or get off the roads, leaving roads more safe.
6. For telematic usage based insurance: Continuous tracking of vehicle location enhances both personal security and vehicle security. The GPS technology could be used to trace the vehicle whereabouts following an accident, breakdown or theft.
7. The same GPS technology can often be used to provide other (non insurance) benefits to consumers, e.g. satellite navigation.

Potential Disadvantages Of Pay Drive Insurance (PAYD)

1. Prepaid insurance (usage based or not) charges for future rather than past risk, and inevitably predicts some drivers’ risk imprecisely. For example, a distance-based system may not distinguish between highway, city street, or rural back road driving. (Premiums can vary by zone to minimise this effect.) A telematic system may charge a driver who speeds, but otherwise drives in a safe manner, more than a slower driver who changes lanes abruptly, or drives in an inattentive or careless manner.
2. Some pay as you go insurance systems (but not all) use continuous GPS tracking of vehicles, which may constitute an unacceptable infringement on customers’ privacy.

Commercial products

Insurance companies offering various forms of pay as you drive insurance either as fully commercial products or at least on a trial basis include Progressive, Liberty Mutual, MileMeter  and GMAC in the United States, Pay As You Drive car insurance from Real Insurance in Australia, insurethebox, i-kube in the United Kingdom, Hollard Insurance in South Africa, AIOI Insurance Company in Japan, Aviva in Canada, OUTsurance and MiWay in South Africa.

Norwich Union has now discontinued their Pay Per Mile Insurance product in the UK, and announced that existing users will have their contracts terminated. The reason given to customers was lack of demand for the service, and disappointing uptake.

While it will depend largely on your insurance company, your driving habits may be tracked by GPS or regular odometer readings. Other devices will allow the insurer to record your speed, distance, and breaking habits. Each of these systems has its own drawbacks and merits. GPS can’t track driving habits while habit monitoring systems can’t track where you drive.

Bottom line Pay as you drive insurance is a good bet for people who don’t drive very often but bear in mind that your rates could increase depending on how and where you drive. Pay as you go insurance should be carefully considered before using it.

Those Who Read This Also Read:

1. Progressive Snapshot Discount Comes to Mississippi and Wyoming
2. Minnesota Police Cite 21 Drivers in July for High-Risk Speeding
3. Drivers License Point Systems
4. Alcohol-Detection Research Backed by Members of Insurance Industry
5. Progressive Snapshot Discount Program Comes To Idaho
6. Allstate Launches Telematics-Based Auto Insurance Discount Program