Pay-As-You-Drive Insurance: What is it and how does it work? | Mint

In recent years, the auto insurance industry has seen significant innovations, one of the most noteworthy being Pay-As-You-Drive (PAYD) insurance. Unlike traditional auto insurance, where premiums are largely fixed and based on factors like age, gender, and driving history, PAYD insurance offers a more personalised approach.

If you drive less than 10,000-15,000 km/year, you can receive a discount on your own damage premium of up to 85%, based on your annual mileage. This type of insurance bases premiums on actual driving behaviour and mileage, leading to potential cost savings for drivers and promoting safer driving habits.

Advantages

Cost savings: PAYD insurance allows low-mileage drivers to save money. Premiums are based on actual usage rather than estimated mileage, which can be more economical for those who drive infrequently.Drivers who use their cars less frequently or exhibit safe driving behaviours can benefit from lower premiums.

Incentive to drive less: PAYD insurance encourages policyholders to reduce their driving. This can lead to lower traffic congestion, reduced emissions, and decreased wear and tear on vehicles. PAYD insurance offers a more personalised insurance experience, with premiums tailored to individual driving habits

Fair pricing: Traditional insurance often charges similar premiums regardless of mileage. PAYD insurance offers a more equitable pricing model, charging drivers based on how much they use their vehicles.

Flexibility: This model provides flexibility for drivers who may have variable driving patterns. For instance, someone who uses their car more during certain seasons can benefit from adjusting their premiums accordingly.

Enhanced safety: With PAYD insurance, driving habits are often monitored through telematics devices. This can promote safer driving behaviours as drivers become more aware of their driving patterns being recorded.By monitoring driving behaviours, PAYD insurance incentivizes policyholders to drive more safely, potentially reducing accident rates.

Disadvantages

Privacy concerns: PAYD insurance requires tracking devices to monitor mileage and driving behaviour. Some drivers may be uncomfortable with the level of data collection and potential privacy intrusions.

Variablecosts: While PAYD can save money for low-mileage drivers, it can be more expensive for those who drive frequently. Drivers with high mileage may find traditional insurance more cost-effective.

Potential for misuse: There is a risk that drivers may try to manipulate their driving data or avoid using their vehicle for necessary trips to save on premiums, which can lead to inconvenience and potential safety issues.

Limited availability: PAYD insurance is not universally available and may not be offered by all insurers. Availability can vary by region and insurance provider.

Dependence on technology: The effectiveness of PAYD insurance relies on telematics devices and technology. Technical issues or malfunctions can lead to inaccuracies in data collection and billing.

How does PAYD insurance work?

Telematics device installation: To enrol in a PAYD insurance program, a telematics device is installed in the insured vehicle. This can be a plug-in device, a mobile app, or an in-built system in modern vehicles.

Data collection: The device collects data on various driving parameters:

•Mileage: The total distance driven.

•Driving habits: Speed, braking patterns, acceleration, and cornering.

•Time of day: Driving during high-risk periods, such as late at night or during rush hour.

•Location: Some systems track location to assess risk based on the areas driven.

Data transmission: The collected data is transmitted to the insurance provider in real-time or at regular intervals.

Premium calculation: Based on the analysed data, the insurance provider adjusts the premium. Safe driving behaviours and lower mileage can result in reduced premiums.

How to check if you drive less?

First things first, get into that driver’s seat and follow the below steps:

Step 1: In your car, look for a small rectangle usually containing five or six numbers near the speedometer. If your car is newer, it may be digital. If your car is older or less modern, it will be a physical or mechanical set of numbers.

Step 2: Now, simply make a note of the number displayed. This is the number of kilometres your car has driven in its life.

Step 3: Divide the number by how old your car is. For example, say your car reading is around 45,000 km and your car is 6 years old, then 45,000/6 years would be 7500 km. This means, your car is driven for an average of 7500 km/year.

And yeah, that’s about it! That’s how you can find out how much you drive and if this car insurance with the pay-as-you-drive add-on could be perfect for you too!

In conclusion, PAYD insurance represents a significant shift in the auto insurance industry, offering a more personalised, cost-effective, and safe driving experience. While there are challenges to overcome, the benefits for policyholders, insurers, and society are substantial.

As technology continues to advance and the regulatory landscape evolves, PAYD insurance is poised to become a mainstream option for drivers worldwide. Embracing this innovation can lead to a safer, more efficient, and environmentally friendly future on the roads.

Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited