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Pay As You Drive Auto Insurance
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PAYD
PAYD (or Pay As You Drive™) is a type of telematic automobile insurance
sometimes known as usage based insurance whereby the costs of motor insurance
are dependent upon vehicle usage, particularly distance travelled. Pay As You
Drive™ is a trademark of Norwich Union. The term pay as you drive has also been
used by certain governments in relation to another cost of motoring, namely road
pricing.
Economic and environmental impact
In economic terms, PAYD can be regarded as a form of context-aware service.
PAYD has been strongly promoted by environmental and transport groups, mostly as
a way of encouraging people to use their cars less.
However, some transport planners have suggested that PAYD could be seen instead
as a way of generating funds for building additional roads [1].
PAYD insurance
Concept
The simplest form of Pay As You Drive bases the insurance costs simply on the
number of miles driven. However, the general concept of Pay As You Drive
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 drive (PAYD) means that the insurance premium is calculated
dynamically, typically according to the amount you drive. Driving is monitored
using a secure black-box device in the vehicle, linked to a national network of
satellites and data recorders. 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.
Insurance companies have always tried 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.
PAYD 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 PAYD, this reduction would be immediately
reflected in the cost of car insurance for that month.
Potential benefits
* Commercial benefits to the insurance company from better alignment of
insurance with actual risk. Improved customer segmentation.
* Potential cost-savings for responsible customers.
* Social and environmental benefits from more responsible and less unnecessary
driving.
* Due to the 24/7 aspects of vehicle location, it enhances security - both
personal security and vehicle security. The GPS technology could be used to
trace the vehicle whereabouts following an accident, breakdown or theft.
* More choice for consumers on the type of car insurance available to buy
* The same GPS technology can often be used to provide other (non insurance)
benefits to consumers,e.g. satellite navigation
* 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.
Potential drawbacks
* The system recognises only codified, rather than actual, risk. A speeder, for
example, would be heavily penalised in comparison with someone who drove in
observance of the speed limit. This would not take into account the
circumstances involved, eg if the speeding driver in question was driving in an
otherwise safe manner, or if the slower driver was changing lanes abruptly, or
driving in an unattentive or careless manner.
* Charges would be very high for young drivers, especially at night, and as such
would strongly discourage them from driving socially. In many areas public
transport is non-existent at night, and such high charges could have a strong
negative impact on their quality of life.
* GPS tracking of vehicles, 24 hours a day, could be seen by many people as an
unacceptable infringement on their right to privacy, although the devices do not
necessarily beam live tracking data immediately back to the insurance company as
usually the systems store the vehicle usage information which is then sent to
the insurance company overnight.
* The potential of PAYD systems for automated traffic law enforcement could
result in a reduction of the use of human traffic police as has been reported
since the widespread introduction of speed cameras. This could result in reduced
detection of drunk driving and other dangerous offences.
Commercial products
Insurance companies offering various forms of PAYD either as fully commercial
products or at least on a trial basis include Norwich Union in the UK, Hollard
Insurance in South Africa, AIOI Insurance Company in Japan and Aviva in Canada.
Progressive Insurance
TripSense is the vehicle insurance discount program developed by Progressive
Insurance. It is currently being evaluated in trial programs in Michigan,
Minnesota, and Oregon.
The program allows policyholders to earn a discount on their premiums by having
their driving data collected by an on-board TripSense device. Collected data is
reviewed by the policyholder before it is shared with the insurance company. The
policy holder is told how much of a discount, if any, he or she qualifies for
based on their data. Policy holders can then choose to share the data with the
insurance company and earn the discount, or withhold the data and pay the normal
premium. The amount of discount is based on maximum speeds, numbers of miles
driven, and times of day driven. Acceleration and braking data is also
collected, but is not used in the calculation of the discount.
The TripSense device connects to a car's OnBoard Diagnostic (OBD-II) port. (All
automobiles built after 1996 have an OBD-II.) The device records information
about the duration of a trip, the mileage driven, the rate of accelerations and
deceleration, and speed. There is no GPS in the TripSensor device. No location
information is collected.
The TripSensor device is based on the Davis Instrument's CarChip. The CarChip is
normally sold as a means for parents to monitor their children's driving
behavior. Users may directly view their data by connecting the device to their
computer's USB port.
Tests
A number of tests of telematic auto insurance are currently underway or recently
completed. These tests are being conducted in many different countries. They
include:
* King County, Washington: 5000 person trial by Unigard Insurance with US$ 1.9
million in US federal funding [1]
Patents
There are several issued patents [2] and pending patent applications that have
been filed worldwide on various inventions related to telematic auto insurance.
These include:
* EP patent 0700009 “Individual evaluation system for motorcar risk”
* US patent 5797134 "Motor vehicle monitoring system for determining a cost of
insurance" Progressive auto insurance
* jp patent 2002259708 "Vehicular Insurance Bill Calculating System, On-Vehicle
Device, and Server Device" Toyota
* wo patent 2005083605"Insurance Fee Calculation Device, Insurance Fee
Calculation Program, Insurance Fee Calculation Method, and Insurance Fee
Calculation System", AIOI Insurance Company.
These patents are controversial. Many see them as hindering development of the
technology as opposed to incubating the development of the technology.[3] [4]
References
1. ^ "King County gets $1.9 million to test drive innovative statewide car
insurance program", March 27, 2007
2. ^ Nowotarski, Mark, "Progressive Builds a Fortress of Patent Protection",
Insurance IP Bulletin, October 15, 2004
3. ^ Strauss and Hollis, 2007, Insurance Markets When Firms are Assymetrically
Informed: A Note (HTML).
4. ^ Hollis and Strauss, 2007, Privacy, Driving Data and Automobile Insurance:
An Economic Analysis (HTML).
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