End of the road for PAYD?… maybe not


Norwich Union isn't exactly forthcoming with the reasons, except to say that the scheme only attracted around 10% of the insurer's target of 100,000 subscribers.

Back in January 2005, Strategy Analytics said that Pay As You Drive insurance schemes were not commercially viable, and would remain out of the mainstream for another three years, despite consumer interest and continued trials.

At the time, a number of insurance companies across Europe and the US had begun PAYD trials, including Norwich Union in the UK, Progressive in the US, Lloyd Adriatic in Italy, AXA Insurance in Ireland, and IBM was involved in a number of trials across Europe and the US.

Strategy Analytics analyst, Clare Hughes, said that prohibitive launch costs, privacy violations, patent fees, back-office data integration and difficulties in measuring costs versus benefits would inhibit the immediate widespread launch of PAYD schemes.

Was she right?

Some industry analysts say consumers are still wary of the Big Brother aspect of such schemes, i.e. they're uncomfortable with their insurance company knowing when and where they drive, at what speed, and how long they stay when they get there. However, this fear is somewhat redundant when you consider that if you have a sat nav service or even a cell-phone, your service providers probably know exactly where you are at any given moment.

Norwich Union has multiple telematics- and insurance-related projects on the go. PAYD was just one of them, with IBM infrastructure and TrafficMaster devices. The other – a fleet product – has been pretty successful.

According to an industry insider, there are quite a few reasons why Norwich Union's PAYD product fell flat.

Firstly, the offer is based purely on price, not on service. In the price-sensitive insurance market, this left NU open to undercutting by competitors.

Secondly, while the hardware is complex (read: "expensive"), and included navigation, it did not include a crash sensor. Thus, although navigation was offered, a driver assistance service was not.

Industry experts believe that a better way to introduce PAYD has been seen across Europe, with a "smooth transition" from insurer-provided after-theft tracking and recovery, road assistance, emergency call and a discount, followed – when the market is ready – by the introduction of PAYD insurance options.

PAYP (pay as you pollute) can then be introduced, since the technology is already present in most vehicles.

An insurance expert based in Korea agrees, saying that there is NO killer app with telematics, other than a good combination of everything, i.e. one multi-functional device suitable for many applications. Any telematics hardware that serves only one purpose will never be good enough.

Mileage-based insurance is not new. More than forty years ago, Nobel Prize winner William Vickery proposed a system to measure wear on tyres by weighing them, then using the measurements to calculate a distance-based insurance rate.

According to CLF Ventures, other mileage-based ideas include a pay-at-the-pump system funded by fuel tax surcharges, with revenues distributed to insurance companies or a government-run insurance agency. These and other proposals were not welcomed by either the insurance or the petroleum industries.

British Columbia-based Victoria Transport Policy Institute (VTPI) says that the insurance industry has generally opposed PAYD pricing because it would lower total premiums, and, consequently, would reduce long-term profits. PAYD insurance requires changes in the way fees are calculated.

High-mileage motorists tend to oppose PAYD insurance because it would increase their costs. But in all fairness, such motorists have, for years, been subsidised by low-mileage – and thus lower-risk – drivers, since both pay premiums based purely on vehicle value and the driver's history of previous claims.

In 2004, Progressive Direct introduced usage-based TripSense, with insurance premiums based on data gathered by a device that plugged into the vehicle's On-Board-Diagnostic (OBDII) port. The device logged mileage as well as driver behaviour information, such as vehicle speed, acceleration and braking.

In mid-2007, GMAC Insurance and OnStar rolled out a low mileage discount program to subscribers who drove less than 15,000 miles a year.

In South Africa, Hollard's PAYD scheme splits monthly premiums into two portions: a fixed premium (which includes the GPS tracking device) based on vehicle value, driving record, etc, and a variable premium based on kilometres driven over and above the "free" 417 km. While the insurance premium is capped at 3,200 km per month, the mileage is not; thus anything over 3,200 per month is disregarded in the variable premium calculation.

The GPS tracking device must be Skytrax, which means it can double as a vehicle-tracking device and an emergency panic button, since the Skytrax technology is owned and operated by Tracker. Existing Tracker customers can have their devices upgraded. Netstar, Matrix, C-Track or other tracking devices are, unfortunately, not compatible with the system.

So, with PAYD alive and well in the US and South Africa, let's see how it's doing on the European market.

There are clear winning business models out there, and success stories abound. Besides after-theft tracking and assistance, some insurers also provide warranty and maintenance services, either in advance of or on top of PAYD insurance.

"The key differentiator here is ‘service'," says Harald Trautsch, vice president of business development at Octo Telematics – one of the many service providers making Telematics-based insurance a reality.

Trautsch is buoyant about his subscriber additions in Europe: just over a quarter of a million in 2007 and 140,000 so far in 2008, with approximately 1,200 added every working day just in Austria (Uniqa), France (AXA), Italy (AXA, Allianz, Reale Mutua, Sara, Unipol and Aurora/Linear), Spain (MAPFRE) and the UK (Norwich Union). Germany and Russia are expected to launch insurance-based telematics applications in 2009.

In fact, Trautsch believes the market is growing very fast, with Brazil's recent regulation on compulsory after-theft equipment and Europe's eCall expected to become mandatory in 2012.

"Service providers now need to make a very simple and financially neutral case to insurers if they want to enter this market," says Trautsch. "Make the calculations very clear. Enable the service to include crash sensors and post-crash service that will automatically deliver the vehicle to an approved repair shop to reduce the cost of claims and repairs for both the underwriter and the driver."

So, far from signalling the beginning of the end for PAYD, Norwich Union's announcement merely indicates that the business model and the delivery strategy could have been better managed. Combine the right service strategy with a clever business model and the right partner, and the 700,000 vehicles being tracked in Europe today will soon become seven million.

The term "Pay As You Drive" was coined by Progressive Insurance in the US. It is used in this article for the sake of simplification.

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