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Pay-as-you-drive insurance: customized insurance for your customers

01/09/2022 • Edouard Boisnel

Pay-as-you-drive insurance is more than ever a solution to the rising fuel prices we are experiencing. Add to this a trend towards smoother mobility, and pay-as-you-drive insurance has a very favorable context. In this article, you will discover why pay-as-you-drive insurance is a promising solution to the new mobility expectations of drivers.

Pay-as-you-drive insurance : strong economic and ecological stakes

Supported by the war in Ukraine, inflation is also being felt at the pump. Vehicle owners are seeing their travel costs rise considerably. However, in a context where working from home has taken off since the crisis, habits have changed and driving is becoming less frequent than before.

Apart from this crisis, public transport has also developed well in the last few years, as cities are better and better served. As an example, French people had driven an average of 9,900 kilometers in 2020, compared to over 12,000 in 2019 (Ministry of Ecological Transition).

So if saving money on fuel seems complicated, other solutions exist to lighten drivers' bills. In particular, gains can be made on car insurance. Known as usage based insurance, they allow users to make significant savings on their premiums. Among these new offers, the "Pay-as-you-drive" system offers a pricing system directly based on the actual driving time or mileage of the insured. Beyond the financial aspect, a strong ecological aspect is also to be taken into account. Environmental issues are more and more present in our daily lives, and transportation is not insignificant. This sector is today one of the main emitters of greenhouse gases. Drivers are aware of this and offers such as the Pay-as-you-drive are an opportunity for insurers to combine CSR and attractiveness.

How Pay-as-you-drive insurance works

How are premiums calculated in a "Pay-as-you-drive" model ?

The "Pay-as-you-drive" system is a form of "per-kilometre" or "per-time" car insurance. It allows insurers to set premiums proportionally according to the road usage of their policyholders.

The first step is to determine an amount that corresponds to a minimum premium covering the vehicle when it is not in use. A price per kilometer or per minute is then defined, also taking into account the profile of the insured. By profile, we mean the risk of accidents, bonus or penalties, past history, etc. Some contracts also include additional conditions, making the rates even more advantageous. Use of the vehicle in the city or in the countryside, at night or during the day, on weekends or during the week.

Who is this offer for ?

Unlike classic insurance, it is the use of the vehicle by its owner that is taken into account. The model is relevant for those who do not travel long distances on a regular basis or have access to other modes of transportation. For example, city dwellers, the elderly or even younger people looking to reduce their expenses.

It is important to keep in mind that the "Pay-as-you-drive" system is primarily intended for drivers who do not drive many kilometers per year. Ideally, less than 8,000 kilometers. Once this condition is taken into account, the savings made make the model much more attractive than traditional insurance. On the insurance side, the commercial strategy could initially be to propose these offers as a last resort to customers who are about to leave. However, the impact of Covid and the rise of work-from-home have made the demand more and more prevalent.

For example, on the French market MAIF decided to promote on its corporate website the insurance offer for its subsidiary Altima. As a result, the rate of subscriptions has multiplied by more than 8 compared to the pre-Covid period!

How to make such an offer ?

Making an offer based on usage and assessing the risk according to the proposed rate cannot be done without essential data. The insurer needs to know regularly the mileage or the driving time achieved by the insured. This is where telematics comes in. To do this, several approaches exist. When the market offers several solutions, which one should be used to meet the needs of drivers?

  • OBD units: these technologies have shown their limits for their use in telematics insurance. The proof is that their market share is decreasing every year.

  • Connected vehicle data: this only applies to recent vehicles, as manufacturers' offers are not mature enough and too expensive to be integrated into an insurance business model. Especially since there is no standard, this solution is not compatible in the short and medium term.

  • Mobile telematics applications: the only solutions that currently allow for the operation of a large-scale pay-as-you-go insurance program. Because of their simplicity and cost, they have the capacity to change the paradigm of the insurer/policyholder relationship

The new uses amplified by Covid justify the use of these technologies. Nevertheless, if the value proposition for the insured is exclusively a price, we can question their necessity. There are offers on the market that are based on declarative information, with robust contracts in case of false declaration by the insured (e.g. exemption from coverage, increased deductible, etc.). These offers are generally based on a mileage statement to be provided by the insured, possibly supported by a photograph of the odometer. From an operational point of view, it's even simpler! 

Connecting policyholders with a telematics application allows addressing a wider spectrum of value than with any other technology. It also improves the relationship between the insurer and the insured. Here are some benefits of connecting policyholders with a telematics application:

Positive selection of policyholders
In essence, drivers who are willing to use a telematic application and share data will be those with the lowest risk. A very interesting point for the profitability of the portfolio on the insurer's side.

Reduce claims
Collecting driving data to provide a mileage or time rate is a very good reason to promote good practices. Doing double duty: beyond a rate, use behavioral data to help drivers improve. Gamification is a great way to do this and generates real interest from users. At this point, we're talking about a prevention program, not behavioral insurance.

Provide additional services 
Accident detection via smartphone is an excellent feature to simplify the claim process or to automatically assist or even rescue. Providing information on vehicle use is also a source of value for the customer. In this context of soaring fuel prices, reducing consumption through analysis and eco-driving coaching is particularly interesting.

Pay-as-you-drive as a solution for a smoother mobility

Global warming, loss of biodiversity, increased risk of natural disasters, etc. It is obvious that general insurance is facing this new reality. Mobility being a major source of CO2 emissions, the creation of formulas such as "Pay-as-you-drive" is a way for insurers to make their contribution to the climate battle. Motorists are rethinking the way they travel, which means less CO2 is emitted. This is an opportunity for insurers to link competitive advantage and CSR.

As mentioned above, we believe that a "Pay-as-you-drive" offer, in the context of connected insurance, is not an end in itself. It should be seen as a link in the value chain, with the aim of transforming the sector over the long term. Environmental and soft mobility issues are more than ever at the center of society's concerns. These issues open the door to new services. Where traditional insurance is sometimes lacking, new and more innovative offers are appearing on the market. We can mention, for example, electric scooters, or multimodal mobility. Promising insurance products that challenge a sector that is always looking for novelty. Driven by the hyper-digitization of society, insurers have the keys to offer complete and more diversified services. Carbon footprint, accident detection, prevention rewards, driving tips, etc. A key point to stand out from the competition. 

However, despite the multiplicity of technologies on the market today, none is as reliable as the smartphone. It is the only device that can leverage technological innovation for Pay-as-you-drive insurance. To take it a step further, find out now how to strengthen relationships with young drivers through connected insurance.