Usage based insurance, also known as pay as you drive (PAYD) and mile-based auto insurance is a type of automobile insurance whereby the costs of motor insurance are dependent upon type of vehicle used, measured against Time, Distance and Place.
This differs from traditional insurance, which attempts 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.
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In economic terms, usage based insurance can be regarded as a form of 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.
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:
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.
Telematic usage based insurance (i.e. the latter two types, in which vehicle information is automatically transmitted to the system) 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.
Insurance companies offering various forms of usage based insurance either as fully commercial products or at least on a trial basis include Progressive, Liberty Mutual, MileMeter [15] and GMAC in the United States, Pay As You Drive car insurance from Real Insurance in Australia, insurethebox, i-kube, Coverbox in the United Kingdom,[4] Hollard Insurance in South Africa,[5] AIOI Insurance Company in Japan, Aviva in Canada, OUTsurance and MiWay in South Africa.
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.[6]
Insurethebox started selling UK policies in 2010. Insurethebox fit a telematics device, known as a Clear Box (slightly bigger than a mobile phone), to the car. The Clear Box enables the company to measure how well and how far the car is driven. Younger drivers who drive well and lower than average mileage drivers can expect significant savings to their car insurance. The lower the mileage, the cheaper the car insurance - so initially the policyholder buys 6,000 miles of cover and the Clear Box monitors exactly how many miles have been driven. Should additional miles be needed, the policyholder buys top-ups. Top-Up Miles can be bought in bundles of 250, 500, or 1,000 miles and surplus miles can be rolled over to the next policy year.
Policyholders can also earn Reward and Bonus Miles. Good driving earns Bonus Miles on a monthly basis. Reward Miles are earned by buying online through insurethebox's Shopping Box, as the company has partnered with a number of leading high street retailers.
Snapshot is a car insurance program developed by Progressive Insurance in the United States.[7][8] 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. Snapshot is currently available in 39 states including: Alabama, Arizona, Arkansas, Colorado, Connecticut, District of Columbia, Florida, Georgia, Idaho, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Mississippi, Montana, Minnesota, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Wisconsin and Wyoming.[8]
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 Snapshot 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.
Onboard Advisor is a commercial lines usage based insurance product by Liberty Mutual. It offers up to 40% discount to commercial and private fleets based on how safe they actually drive. It also offers a set of tools for assisting fleet owners to improve safety as well as reduce fuel consumption and other operational expenses. The program bundles several solutions[9] for increased value add to customers: Performance Advisor (insurance and safety monitoring part) is provided by Sensomatix, Mobile Advisor (fleet monitoring part) is provided by Telogis,[10] and Fuel Advisor (fuel card application) is provided by Voyager/US Bank.
Pay As You Drive is a product developed in Australia by Real Insurance[11] and Exigen Insurance.[12] 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.
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.[13]
MileMeter is an insurance company that offers pay-by-the-mile auto insurance.[14] They were selected as a finalist in the 2007 Amazon.com Web Services Startup Challenge. MileMeter is currently only licensed to provide insurance in the state of Texas.[15]
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.[16] IRIS is located in Coventry, United Kingdom.
GMAC Insurance is one of the first and largest auto insurance companies to institute a Pay-As-You-Drive (PAYD) program in the United States back in 2004.[17] The GMAC Insurance Low-Mileage Discount is an innovative program offered to OnStar subscribers in 34 states, where those who drive less pay less on their auto insurance.
This opt-in program is the first of its kind[18] leveraging state-of-the-art technology using OnStar to allow customers who drive fewer miles to benefit from substantial savings. Eligible active OnStar subscribers sign up to save on their premiums if they drive less than 15,000 miles annually. Subscribers who drive even less than that can save even more (up to 54%).[19]
Under the program, new GMAC Insurance customers receive an automatic insurance discount of approximately 26 percent[20] upon enrollment (existing OnStar customers receive a discount based on historical mileage).
With the subscriber’s permission, the odometer reading from his or her monthly OnStar Vehicle Diagnostics report is forwarded to GMAC Insurance. Based on those readings, the company will decrease the premium using discount tiers corresponding to miles driven.
Information sent from OnStar to GMAC Insurance pertains solely to mileage,[21] and no additional data is gathered or used for any purpose other than to help manage transportation costs. Customers who drive more than 15,000 miles per year are not penalized and all OnStar customers receive an insurance discount simply for having an active OnStar subscription.
The company plans to include additional states in the future.
AZ LOGICA[22] has developed the PAY AS YOU DRIVE application for Latin America environments. The developing environment is taken in account to calculate the premium. The end device in hardware and the management software design are co-created with the customer (Main Insurance companies)above the AZ Telematic Platform, which serves as base to the final product. The result is a tailor made application which qualifies only the important characteristics for each company. It is being tested in Colombian and in Brazilian main insurance companies, and soon will be expanded to other Latin American countries.
MiDriveStyle is a product developed in South Africa by MiWay.[23] The product calculates car insurance premiums based on the customers individual "Drive Style". Driving style is not only determined by how far and when the vehicle is driven but also where and how it is driven. Driving style includes acceleration, deceleration, speeding and swerving. A unique feature of the MiDriveStyle device is that it doubles up as a tracking device.
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:
There are several issued patents[25] and pending patent applications that have been filed worldwide on various inventions related to telematic auto insurance. These include:
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.
In June 2010, Progressive Auto Insurance filed a patent infringement lawsuit against Liberty Mutual over one of Progressive’s Pay As You Drive auto insurance patents.[26]
In September 2010 Progressive Auto Insurance filed a declaratory judgment lawsuit against Hughes Telematics to have several its patents covering OBDII mounted wireless data loggers declared invalid. Progressive uses these devices from a competitive supplier, Xirgo Technologies.[27]
The use of telematics to detect drunk driving and Texting while driving has been proposed.[32] A US patent application combining this technology with a usage based insurance product was open for public comment on peer to patent.[33]