Pay as you Drive- The Future for Car Insurance?
By Nick Funnell
Tuesday 19th June 2007
After two years of painstaking trails, Norwich Union officially launched their trademarked ‘Pay As You Drive’ car insurance product in October 2006. For a one-off fee of £50, a small black box is fitted into the driver’s car, enabling the insurer to track exactly how many miles have been driven, on which roads and at what time of day. Itemised monthly bills, based on miles driven, are then received for the car’s insurance, similar to those for mobile phone use.
Mileage and types of journey undertaken have always been factors in setting an individual’s annual premium, though until now measuring this has been through vague driver self-estimation. Now Norwich Union, working together with technical partners IBM and Orange, have developed a patented system called ‘telematics’, which combines communication and information technologies such as GPS to record a vehicle’s every movement.
Social Campaigning in the US
Over in the US, pay-per-mile insurance has been a hot-button issue for the last 20 years, campaigners claiming that its introduction would make insurance more affordable for lower-income groups. Uninsured drivers are a huge problem in America, with estimates ranging from 4-34% of all drivers having no cover. US insurance companies have dragged their heels on pay-per-mile, their detractors arguing they are happy to cream profits through high annual premiums- regardless of mileage- from those who can afford to pay.
Up until now, the only technology available for pay-per-mile has been the relatively low-tech in-car odometer. This has given the insurers another reason to prevaricate, claiming that odometer tampering (similar to ‘clocking’ a car’s mileometer) will be widespread. Also, the relationship between miles driven (the only thing the odometer measures) and risk of having an accident is not a simple one- road type and time of day need to be factored in. Many Americans, on both sides of the argument, are watching Norwich Union’s PAYD innovation with great interest.
Wait ‘Till the Midnight Hour- That’s when the Accidents Happen
The introduction of telematics technology allows the insurance cost to the individual to be flexed according to journey risk. Years of research have built up a huge bank of information for companies like Norwich Union to utilise in their pricing structures. Findings include the following:
- Motorway and dual carriageway driving is relatively safe- up to 10 times safer than driving on low-speed urban roads
- Morning rush-hour traffic driving is 50% more likely to result in accident than weekend or pre-midnight driving
- Accidents are more likely to occur between midnight and 5am. This is particularly the case for younger drivers (defined as those under 24). They are 10 times more likely to have an accident at night, and account for 45% of all road fatalities between the hours of 11pm and 6am.
“The young”, said Aristotle, anticipating the attitude of motor insurers by several centuries, “are permanently in a state resembling intoxication.” Car insurance has always discriminated against younger drivers, and Norwich Union’s findings seem to justify this. However, PAYD’s pricing structure (see below) is being marketed- possibly aiming towards parents ‘helping out’ with insurance costs- as both a way of keeping youngsters’ premiums down and themselves out of Accident and Emergency.
What You Will Pay
Norwich Union’s PAYD prices are structured so that after the initial installation fee and a monthly fixed amount to cover fire and theft risks, you pay as follows:
Motorists aged 24 to 65
Road type | Peak time* | Off-peak time** |
|---|
Motorway |
From 1.5p per mile |
From 1p per mile |
Dual carriageway |
From 2.5p per mile |
From 1.5p per mile |
Single lane roads,
50/60mph limits |
From 6p per mile |
From 4p per mile |
20/30/40mph limits |
From 12p per mile |
From 7p per mile |
*Midnight to 5am, 7am to 10am Monday to Friday (excluding Bank Holidays)
**All other times
Motorists aged 18 to 23
| Peak time* | Off-peak time** |
|---|
£1 per mile |
From 5p per mile |
*11pm to 6am
**All other times
Note the important ‘from’ quoted in all these prices. The actual rates paid will be flexed depending on more traditional car insurance factors such as type of car, where you live, garaging arrangements and previous claims.
Norwich Union claim that savings can be made by most people driving less than 8000 miles per year, also motorway drivers and those who avoid the morning rush-hour. Of course, these factors may not necessarily be fixed. The extent to which policies such as this can influence and change driver behaviour is perhaps the most interesting aspect of pay-per-mile insurance.
Driver Incentives- Fitting in with Public Policy?
No government could ever advocate the products of services of a particular private insurance company, but Norwich Union can certainly claim social ‘brownie points’ from the introduction of PAYD. The new product meshes nicely with current public policy in several ways:
- Social exclusion: as mentioned above, PAYD could reduce insurance costs for low-income groups, and may have an impact on reducing the number of uninsured drivers.
- Consumer fairness and choice: The insurance product price is ‘unbundled’, leading to greater clarity for consumers. For accident risk, they pay only for the miles they choose to travel.
- Congestion reduction: Norwich Union’s PAYD price structure is effectively time-sensitive congestion charging for urban areas. Drivers are incentivised to seek alternative travel times, work from home more or use public transport.
- Accident reduction: again, the pricing structure discourages drivers (particularly younger ones) from using the more hazardous times and road types.
- Environmental damage: drivers may be encouraged to use their cars less, resulting in reduced harmful emissions and improved community ‘liveability’.
The government may be less happy, however, about potentiality giving ammunition to those campaigning against what they see as the excessive use of speed cameras in the UK. Groups such as SpeedCameras.org argue that cameras should be removed from lower risk roads, claiming their introduction has done nothing to cut serious accidents and fatalities over the past ten years. That an independent, hard-headed insurer like Norwich Union has decided its profitability is best served by charging much less for the use of motorways and dual carriageways may help to support the idea that cameras are mere money-raising devices when deployed on these road types.
Whatever the consequences, pay-per-mile car insurance seems an idea whose time has come. It would be surprising if other companies failed to follow Norwich Union’s lead by offering similar products in the near future.
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