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Pay-As-You-Drive is a variable pricing model for auto insurance, where the more you drive the more you pay - the topic of my "Middle Year" thesis. This was a concise presentation on the topic.
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Pay-As-You-Drive
An Innovative Way to Price Insurance
Vocabulary
l PAYD: Pay-As-You-Drive l GPS: Global Positioning System l GNSS: Global Navigation Satellite System l Telematics: Describes an array of services offered to motorists through devices
built into their vehicles and linked wirelessly to the Web.
Auto Insurance Market l More than ¼ of consumers stated they shopped
for auto insurance in the past year, 33% of which used the internet to get a quote.
l 66% of customers who were moderately satisfied with their insurance company claimed they would switch to a different carrier for a lower coverage price.
l “This year’s study reflects the financial return available to carriers for providing quality service,” Jeremy Bowler, senior director of the insurance practice at J.D. Power.
Consumer Market Profile l Generation X (born from 1961-1981) l Generation Y (born from 1979-1994, composed of
60 million people)
- Less experienced and less loyal buyers
- Better-educated, technically savvy
- Increasing life changes
- Fickle consumers
-In favor of paying bills monthly
- More conscientious, take part in political consumerism
Inefficiencies with Current Policies l Actuarial inaccuracies: disparity between class and
usage levels.
l Economically inefficient insurance rates. l No way of distinguishing repeat high-risk drivers from
those who are involved in random crash events. l 40% of motorists are estimated to be uninsured,
according to the bodily injury count. l Encourages an all-you-can drive mentality
l Low-mileage drivers with less-driven cars are unlikely to be added to a policy.
Societal Benefits
l The implementation of mileage-based insurance between 5¢ and 10¢/mile may decrease household travel by more than 10%.
l A 1% reduction in travel can yield a 1.7% reduction in vehicle-crash events.
l Annual reduction of approximately 30 fatalities and 200 injuries.
Societal Benefits
l Reduction in property damages. l Reduction in traffic congestion by 15-25%,
along with road maintenance and taxes. l Reduces fuel usage and CO2 emissions
by 13.5%
Mileage vs. Damages
• Institute for Traffic and Transport, Logistics and Spatial Development, The Netherlands http://www.cedelft.eu/
Social Cost Analysis Overview of social costs and benefits of PAYD
• Institute for Traffic and Transport, Logistics and Spatial Development, The Netherlands - http://www.cedelft.eu/
Cost Benefit to Consumers
Mileage Fee Travel Reduction
1¢ -1.8%
2¢ -3.5%
3¢ -5.1%
4¢ -6.7%
5¢ -8.2%
6¢ -9.7%
7¢ -11.2%
8¢ -12.5%
9¢ -13.8%
10¢ -15.2%
Type of Driver Savings
Low-cost, Low mileage
$325
Average motorist
$200
High-mileage May be increased by up to $100
But you may say…
l Insurers already provide benefits for low-mileage drivers.
l How come insurance companies don’t already use it?
l How will older cars accommodate needed technology?
Pilot Projects
l General Motors and On-Star offers mileage-based discounts to subscribers.
l Norwich Union - the UK’s largest insurance company
worked with IBM to design a “black box” device. l Progressive - Received a patent on it’s Autograph
program introduced in Texas and TripSense in Minnesota.
l Georgia- In 2003, introduced bill HB 201, enabling
insurers in the state to offer consumers a choice of mileage-based insurance.
l Massachusetts and Pennsylvania
But would PAYD be Profitable?
l IBM states that on-demand business models constitute the practices of 30 Fortune 500 companies.
l 38-44% of accident damage costs depend on distance,
leading in the European market for 1.2 billion worth of premiums that would become distance-dependent.
l Would attract 25-50% of policies during the first few years.
l Untapped low-mileage driver market
Implementation
l Trip Sensor, a free device that plugs into the On-board Diagnostic port (OBDII) found near the steering column in almost all 1996 models l GPS Tracking- currently has 2 million customers Gm has reported that they will double the
number of vehicles equipped with the OnStar in-vehicle communications system by 2006 due
to customer demand. l Tag or computer chip which transmits current
odometer readings.
State Legislation
l 63% of states reported that nothing in their legislation prohibited PAYD.
l In New York, all authorized insurers must file their motor vehicle insurance rates with the Superintendent of Insurance.
l In West Virginia, residents have to be insured at all times.
l Michigan requires an upfront statement of the premium charge.
Incentives
l Oregon State passed bill HB 2043 in April 2003, offering insurers tax credits of $100 for every PAYD policy sold.
l Congress pay pass a bill providing $15 million a year for PAYDAYS (Pay-As-You-Drive-and-You-Save) Grant program.
l Funding provided by the Congestion Mitigation and Air Quality Improvement Program.
l EPA’s green stamp of approval
Barriers and Limitations
l Requires insurers and brokers to change how they calculate premiums; develop new procedures and modify existing computer programs.
l Makes premiums and insurance revenues less
predictable. l High cost of proper monitoring. l Consumers are not informed of the product, and are
worried about privacy. l No data to prove whether PAYD’s equity would be
profitable.
Questions ?
l http://marketplace.publicradio.org/play/audio.php?media=/2003/02/25_mpp&start=00:00:24:08.0&end=00:00:27:30.0
