Usage based insurance

Usage based insurance, also known as pay as you drive (or PAYD) is a type of automobile insurance whereby the costs of motor insurance are dependent upon vehicle usage, particularly distance traveled.

Economic and environmental impact

In economic terms, usage based insurance can be regarded as a form of Differentiated service (design pattern)
context-aware service. Usage based insurance has been strongly promoted by environmental and transport groups, mostly as a way of encouraging people to use their cars less.

Insurance

Concept

The simplest form of usage based insurance 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. There are three types of usage based insurance:
# Cover is based on the odometer reading of the vehicle.
# Cover is based on other data collected from the vehicle, including speed and time-of-day information in addition to odometer readings.
# Driving is monitored using a GPS device.

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.

Telematic usage based insurance 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 usage based insurance, 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.
* For telematic usage based insurance: 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 [http://www.gmat.unsw.edu.au/snap/publications/usman&lim2006a.pdf Iqbal & Lim, "A Privacy Preserving GPS-based Pay-as-You-Drive Insurance Scheme", International Global Navigation Systems Society, 2006] ]
* 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 inattentive 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.
* The potential of usage based insurance 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 offenses.

Commercial products

Insurance companies offering various forms of usage based insurance either as fully commercial products or at least on a trial basis include [http://www.payasyoudrive.com.au Real Insurance] in Australia, Coverbox in the United Kingdom, [ [http://www.coverbox.co.uk] ] Hollard Insurance in South Africa, [ [http://www.payasyoudrive.co.za] ] AIOI Insurance Company in Japan and Aviva in Canada.

Norwich Union has now discontinued their PAYD product in the UK, and announced that existing users will have their contracts terminated. The reason given to customers was lack of demand for the service, and disappointing uptake. [ [http://www.companycardriver.co.uk/news/article/?art_ID=455143201 Norwich Union withdraws black-box insurance, Compay Car Driver, 18 June 2008] ]

Real Insurance

Pay As You Drive is a product developed in Australia by Real Insurance. [http://www.payasyoudrive.com.au.com] ] It solves a number of the problems that Norwich Union and other telematic solutions face, including privacy issues and variable premiums. Customers pay a minimum premium, and then pre-pay for kilometers.

Progressive Insurance

MyRate is a car insurance program developed developed by Progressive Insurance in the United States. [ [http://newsroom.progressive.com/2008/June/myrate-launch.aspx One-of-a-Kind Car Insurance Program Lets Drivers Save Big Bucks Based on How They Drive] ] [ [http://auto.progressive.com/progressive-car-insurance/myrate-default.aspx] ] It is a voluntary, behavior-based insurance program that gives drivers a customized insurance rate based on how, how much, and when their car is driven. MyRate is currently available in Alabama, Kentucky, Louisiana, Michigan, Minnesota, Maryland, New Jersey and Oregon.

Driving data is transmitted to the company using an on-board telematic device. The device connects to a car's OnBoard Diagnostic (OBD-II) port (all automobiles built after 1996 have an OBD-II.) and transmits speed, time of day and number of miles the car is driven. There is no GPS in the MyRate device, so no location information is collected. Cars that are driven less often, in less risky ways and at less risky times of day can receive large discounts. Progressive has received patents on its methods and systems of implementing usage-based insurance and has licensed these methods and systems to other companies. Progressive has service marks pending on the terms Pay As You Drive and Pay How You Drive.

AIOI

AIOI introduced a Pay as You Drive insurance product in Japan in 2005. They partnered with Toyota to develop the technology. The technology is based on Toyota's G-Book terminals. [ [http://www.ioi-sonpo.co.jp/en/ar_pdf/ar2005e_01.pdf AIOI 2005 annual report, page 37.] ]

MileMeter

MileMeter is an insurance startup company that intends to offer a patent pending form of pay-by-the-mile auto insurance. [ [http://milemeter.com] ] They were selected as a finalist in the 2007 Amazon.com [http://developer.amazonwebservices.com/connect/amazon_startupchallenge.jsp Web Services Startup Challenge] .

IRIS

The International Research and Intelligent Systems Global (IRIS) company's Pay As You Drive and Fleet Risk Management products won Strategic Risk magazine's "European Risk Management Product of the Year 2008". These products are currently under evaluation by two major insurance companies. [ [http://www.birminghampost.net/birmingham-business/birmingham-business-news/2008/05/12/iris-earns-top-european-accolade-65233-20899381/ "IRIS earns top European accolade", The Birmingham Post, May 12, 2008] ] IRIS is located in Coventry, United Kingdom.

GMAC Insurance

GMAC Insurance offers owners of GM vehicles equipped with OnStar a discount if they drive less than 15,000 miles a year. GMAC Insurance receives monthly odometer readings from the vehicle's OnStar system.

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, United States: 5000 person trial by Unigard Insurance with US$ 1.9 million in federal funding [ [http://www.metrokc.gov/exec/news/2007/0327payasdrive.aspx "King County gets $1.9 million to test drive innovative statewide car insurance program", March 27, 2007] ]

Patents

s that have been filed worldwide on various inventions related to telematic auto insurance. These include:

*Cite patent|EP|0700009 "Individual evaluation system for motorcar risk"
*Cite patent|US|5797134 "Motor vehicle monitoring system for determining a cost of insurance" Progressive auto insurance
*Cite patent|JP|2002259708|application "Vehicular Insurance Bill Calculating System, On-Vehicle Device, and Server Device", Toyota
*cite patent|WO|2005083605|application "Insurance Fee Calculation Device, Insurance Fee Calculation Program, Insurance Fee Calculation Method, and Insurance Fee Calculation System", AIOI Insurance Company.

In order to make sure that patents did not hinder its Pay as You Drive development program, Norwich Union purchased the UK version of EP0700009 and obtained an exclusive license to any EU patents that may emerge from Progressive's EU patent applications.

Trademarks

*"Pay as You Drive" is a trademark of Real Insurance in Australia. [ [http://www.payasyoudrive.com.au] ]
*"Pay as You Drive" is a trademark of Norwich Union in England. [ [http://www.norwichunion.com/pay-as-you-drive/ Commercial web site for Norwich Union showing trademark] ]
*"Pay as You Drive" is a registered trademark of Progressive Corporation in the US. [ [http://tess2.uspto.gov/bin/showfield?f=doc&state=8p468p.4.1 US registration of "Pay as You Drive" trademark] ]

ee also

* Road pricing
* Insurance patent
* Auto insurance risk selection

References

External links

* [http://www.payasyoudrive.com.au Pay As You Drive]
* [http://www.centspermilenow.org/ Cents Per Mile organization]
* [http://www.environmentaldefense.org/article.cfm?ContentID=2205 Environmental Defense]
* [http://www.newdream.org/newsletter/PAYD.php New American Dream]
* [http://www.vtpi.org/tdm/tdm79.htm Pay-As-You-Drive Vehicle Insurance]
* [http://news.bbc.co.uk/1/hi/business/5408338.stm "Insurer launches per-mile cover"] BBC News Report (October 5 2006)
* [http://news.bbc.co.uk/1/hi/uk_politics/6160877.stm "Motorists 'must pay for road use'] BBC News Report (December 1 2006)
* [http://www.payasyoudrive.co.za Pay As You Drive Car Insurance]
* [http://www.nctcog.org/trans/air/programs/payd/index.asp Texas Driving Research Study]
* [http://www.obdclearinghouse.com/oemdb/ National ODB Clearinghouse]
* [http://www.elecdesign.com/Articles/ArticleID/8663/8663.html Big Brother in the Back Seat, Electronic Design Magazine, Sept. 06, 2004]
* [http://www.davisnet.com/drive/products/carchip_products.asp Davis Instruments CarChip product literature]
* [https://www.cosic.esat.kuleuven.be/publications/private/article-944.pdf PriPAYD: Privacy Friendly Pay-As-You-Drive] by Troncoso et al (Workshop on Privacy in the Electronic Society 2007)
* [http://www.PriPAYD.org/ PriPAYD.org : Privacy Friendly Pay-As-You-Drive]
* [http://www.georgesdelataille.com/georges_de_la_taille/2007/03/pay_as_you_driv.html Pay-As-You-Drive from Georges de la Taille]
* [http://www.pay-as-you-drive.org/ Privacy Friendly PAYD]
* [http://www.ebonus.org/ ebonus.org : The flexible insurance premium providing driver privacy protection]