Pay-As-You-Drive Middler-Year-Presentation

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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.

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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  • 1. Pay-As-You-DriveAn Innovative Way toPrice Insurance
  • 2. Vocabularyl PAYD: Pay-As-You-Drivel GPS: Global Positioning Systeml GNSS: Global Navigation Satellite Systeml Telematics: Describes an array of servicesoffered to motorists through devicesbuilt into their vehicles and linkedwirelessly to the Web.
  • 3. Auto Insurance Marketl More than ¼ of consumers stated they shoppedfor auto insurance in the past year, 33% of whichused the internet to get a quote.l 66% of customers who were moderatelysatisfied with their insurance company claimedthey would switch to a different carrier for alower coverage price.l  This year s study reflects the financial returnavailable to carriers for providing qualityservice, Jeremy Bowler, senior director of theinsurance practice at J.D. Power.
  • 4. Consumer Market Profilel  Generation X (born from 1961-1981)l  Generation Y (born from 1979-1994, composed of60 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
  • 5. Inefficiencies with Current Policiesl  Actuarial inaccuracies: disparity between class andusage levels.l  Economically inefficient insurance rates.l  No way of distinguishing repeat high-risk drivers fromthose 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 mentalityl  Low-mileage drivers with less-driven cars are unlikely tobe added to a policy.
  • 6. Societal Benefitsl The implementation of mileage-basedinsurance between 5¢ and 10¢/mile maydecrease 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 fatalitiesand 200 injuries.
  • 7. Societal Benefitsl Reduction in property damages.l Reduction in traffic congestion by 15-25%,along with road maintenance and taxes.l Reduces fuel usage and CO2 emissionsby 13.5%
  • 8. Mileage vs. Damages•  Institute for Traffic and Transport, Logistics and Spatial Development,The Netherlands http://www.cedelft.eu/
  • 9. Social Cost AnalysisOverview of social costs and benefits of PAYD•  Institute for Traffic and Transport, Logistics and Spatial Development,The Netherlands - http://www.cedelft.eu/
  • 10. Cost Benefit to ConsumersMileage Fee Travel Reduction1¢ -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 SavingsLow-cost, Lowmileage$325Averagemotorist$200High-mileage May beincreased byup to $100
  • 11. But you may say…l Insurers already provide benefits for low-mileage drivers.l How come insurance companies don’talready use it?l How will older cars accommodate neededtechnology?
  • 12. Pilot Projectsl  General Motors and On-Star offers mileage-baseddiscounts to subscribers.l  Norwich Union - the UK s largest insurance companyworked with IBM to design a black box device.l  Progressive - Received a patent on it s Autographprogram introduced in Texas and TripSense inMinnesota.l  Georgia- In 2003, introduced bill HB 201, enablinginsurers in the state to offer consumers a choice ofmileage-based insurance.l  Massachusetts and Pennsylvania
  • 13. But would PAYD be Profitable?l  IBM states that on-demand business models constitutethe 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 ofpremiums that would become distance-dependent.l  Would attract 25-50% of policies during the first fewyears.l  Untapped low-mileage driver market
  • 14. Implementationl Trip Sensor, a free device that plugs into theOn-board Diagnostic port (OBDII) found nearthe steering column in almost all 1996 modelsl GPS Tracking- currently has 2 million customersGm has reported that they will double thenumber of vehicles equipped with the OnStarin-vehicle communications system by 2006 dueto customer demand.l Tag or computer chip which transmits currentodometer readings.
  • 15. State Legislationl 63% of states reported that nothing in theirlegislation prohibited PAYD.l In New York, all authorized insurers mustfile their motor vehicle insurance rates withthe Superintendent of Insurance.l In West Virginia, residents have to beinsured at all times.l Michigan requires an upfront statement ofthe premium charge.
  • 16. Incentivesl Oregon State passed bill HB 2043 in April2003, offering insurers tax credits of $100for every PAYD policy sold.l Congress pay pass a bill providing $15million a year for PAYDAYS (Pay-As-You-Drive-and-You-Save) Grant program.l Funding provided by the CongestionMitigation and Air Quality ImprovementProgram.l EPA’s green stamp of approval
  • 17. Barriers and Limitationsl  Requires insurers and brokers to change how theycalculate premiums; develop new procedures and modifyexisting computer programs.l  Makes premiums and insurance revenues lesspredictable.l  High cost of proper monitoring.l  Consumers are not informed of the product, and areworried about privacy.l  No data to prove whether PAYD’s equity would beprofitable.
  • 18. 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