A typical car insurance involves one to either pay a lump sum i.e. a one time premium or pay premiums on regular intervals , at a fixed time period and at a fixed flat fee.
The rise of smartphone usage and lowered cost of technology has enabled insurance companies to come up with a new experimental usage based car insurance. They are known by various other names like –
- Pay As You Drive (PAYD)
- Pay How You Drive (PHYD)
- Mile-Based Auto Insurance
The premiums for this kind of insurance is dependent on the category of the car and things like time, distance, behaviour and place are measured to ascertain the amount for the premium.
It rewards people who drive safely. The rewards include lower premiums and/or a no-claims bonus.
But currently the premiums fluctuate based on past data (driving style, speed and other parameters) which are collected over a period of time.The premiums do not change with present driving patterns or behaviours.
Hence, it will be long before people would start driving safely and the lifestyle habits would be fed into the system for calculating premiums.
Mile-Based Auto Insurance
The Mile-Based Auto Insurance is the simplest form in the sense that it’s premium is the easiest to calculate. It means that the lesser you drive, lower would be your premium.
Pay As You Drive Insurance (PAYD)
On the other hand, the Pay As You Drive Insurance (PAYD) depends on how much one drives, where does one drive to and when ones drives.
The insurance coverage is based on the –
- Odometer – reading of the vehicle which says the distance that it has covered
- GPS Data – Mileage calculations and duration of the drive are calculated using a vehicle-independent module transmitting data via cellphone or RF technology
- Other data collected from the car – speed,time-of-day, historic riskiness of the road, driving actions in addition to distance or time travelled like hard braking and sudden turning of the steering wheel
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. 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 usage-based insurance, this reduction would be immediately reflected in the cost of car insurance for that month.
The amount of the insurance is decided based on dynamic pricing. This is enabled by telematics which provides real time data on driving patterns and thus change the pricing according to the changing risks.
Pay How You Drive (PHYD)
Similar to pay as you drive, the basic difference is that this one has sensors in addition to the ones in the PAYD insurance scheme (i.e. accelerometer, which helps in monitoring the behaviour of driving).
Potential Advantages:
- People would become more conscious on how they drive and how much they drive. Thus, benefitting the whole society and the environment as a whole.
- Monetary benefits for the insurance company from better matching of the insurance with the actual risks involved
- Better Customer Profiling, as it would help in micro-segmentation and thus help in creating a more custom made insurance plan based on suitability.
- The telematics can have a by-product effect by providing help in case of emergency roadside assistance is required or if one needs to make payments using RFID.
- This would help bring down the premium costs considerably for more responsible drivers who otherwise have to pay the marginal extra for the general and less responsible drivers.
- This would help make the roads safer as people who don’t drive carefully, would automatically withdraw from driving too often.
- The sensors and GPS tracking would be able to help one in need for rescue post a road accident and prevent theft of the vehicle.
- Comparison of driving behaviour data with other drivers through gamification could help in encouraging drivers to drive better.
Potential Limitations:
- The prediction made from past data for assessing an individual’s future risk is limited by the fact that a lot of these data are not live and also the driver may or may not continue to drive in the same manner as before.
- Tracking the position of the vehicle at all times using GPS data could put one’s privacy and safety at risk.
- Pricing plans of insurance from various companies would become more difficult to compare and thus would reduce competition in the insurance market.
