Pay-As-You-DriveAn Innovative Way toPrice Insurance
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.
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.
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
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.
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.
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%
Mileage vs. Damages• Institute for Traffic and Transport, Logistics and Spatial Development,The Netherlands http://www.cedelft.eu/
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/
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
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?
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
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
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.
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.
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
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.