Many car insurers are now focusing on Pay As You Drive insurance – some branding it as a unique product offering to the market! In this and a few more blog posts we would like to provide an easy to understand description of this type of insurance, how it is implemented and what the benefits are.
We would like to argue that this is not something new or mysterious– it is the recognition of a general principle of insurance premium calculation – the need to analyze each specific client and calculate a premium for that client.
To understand PAYD car insurance we have to reflect on the basics of calculating car insurance premiums. Your car insurance premium is calculated on the basic understanding that you purchase a car insurance policy to cover yourself against risk. Your insurance premiums are paid as cover against amongst other risks – the risks of vehicle loss and damage to your vehicle.
It is important to recognize that these risks are not the same for all road users. The risks depend on a number of variables such as:
- Driver characteristics – [Age, gender, driving experience, etc]
- The vehicle – [Make and model, safety features, price, replacement value, costs of parts etc]
- The location -[Are where you are driving, crime statistics, vehicle population, traffic congestion etc.]
- The way that you drive – [Distance travelled, accident record, recorded traffic violations etc]
It is on this last variable that Pay As You Drive Insurance focuses. If you drive in a manner that presents less of an accident risk, you should be entitled to paying a lower car insurance premium!
Definition of Pay As You Drive Car Insurance
Pay-As-You-Drive (PAYD) Vehicle Insurance suggests that a vehicle’s insurance premium is based directly on how it is driven during the policy term. This insurance is also referred to Distance-Based, Usage-based, Mileage-Based, Per-Mile Premiums and Insurance Variabilization.
We need to recognize that there is actually a “wide” and a more “limited definition.
Pay as You Drive
This is the wider definition and focuses on more than merely distance. Some insurers argue that you cannot merely make a distance the sole indicator of what “as you drive” really means. They will also pay close attention to your driving record and the evidence on recorded traffic violations, accidents etc
Pay as Far as You Drive
This more “limited” definition focuses more on “how MUCH or how FAR you drive”.
Why do we have Pay-As-You-Drive Insurance?
Vehicle insurance is a significant portion of total vehicle costs – costs that need to be closely monitored in this challenging financial climate. Consumers search to find car insurance that is both affordable and capable of covering all their insurance needs. If the driving behaviour of the vehicle owner presents less of an accident risk, he should be able to pay less for insurance cover than the vehicle owner that presents a higher risk by his more regular and dangerous driving.
Research has proven that annual claims increase with annual vehicle distance travelled. The accuracy with which car insurance premiums is calculated improves significantly if annual distance driven is incorporated in addition to other existing rating factors.
What are the benefits of Pay-As-You-Drive Insurance?
The Victoria Transport Policy Institute has detailed the benefits of Pay-As-You-Drive Insurance. We would like to quote and discuss some of the most important benefits described by the Institute:
- Consumer savings: The average motorist may save on his insurance premiums if he reduces his driving, and therefore reduce the chance of having a crash.
- Economic Efficiency: Pay-As-You-Drive Insurance conveys to drivers the true costs they impose and allows motorists a chance to save money by reducing these costs. It reflects the principle that prices should reflect costs.
- Increased fairness: Current insurance pricing overcharges motorists who drive less than average and undercharge those who drive more than average each year in a price category. It is not fair to “subsidize” other more frequent and less responsible drivers through your expensive car insurance premium!
- Progressive With Respect To Income: Since lower-income motorists tend to drive less than average, current insurance pricing is regressive. It forces lower-income motorists on average to subsidize the insurance costs of higher-income motorists. Butler (2000) argues that current insurance pricing results in extremely high premiums in lower-income areas (since a greater portion of low-mileage motorists drive uninsured which reduces funds to cross-subsidize higher-mileage motorists), a problem that can be corrected by PAYD pricing.
- Increased affordability: Pay-As-You-Drive pricing makes vehicle insurance more affordable and cost effective especially for lower-income households.
- Reduced Uninsured Driving: Affordability is one of the main reasons why many vehicles on our roads are driven uninsured. PAYD pricing makes insurance more affordable, which can help reduce this problem. In South Africa the problem of uninsured driving is a significant threat to Road Safety.
Analysts believe that Pay-As-You-Drive Insurance will reduce vehicle travel by more than 10%. As a result it reduces:
- Traffic crashes
- Traffic congestion.
- Road and parking facility costs
- Energy consumption and pollution emissions
- Consumer costs.
- Urban sprawl and environmental impact.
Pay-As-You-Drive car insurance allows the conservative motorist the option to save money by changing driver behaviour and by driving less. It does not punish the motorist who continues to travel his current distances and should be regarded as a fair measure to calculate car insurance premiums.
Pay As You Drive Car Insurance should be the basis for the calculation of all car insurance premiums. Car Insurers should place an emphasis on WHO is driving, WHERE they are driving, WHAT they are driving but most importantly – HOW they are driving!!
