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.

1. Pay-As-You-Drive
An Innovative Way to
Price Insurance

2. Vocabulary
l PAYD: Pay-As-You-Drive
l GPS: Global Positioning System
l GNSS: Global Navigation Satellite System
l Telematics: Describes an array of services
offered to motorists through devices
built into their vehicles and linked
wirelessly to the Web.

3. Auto Insurance Market
l More than ¼ of consumers stated they shopped
for auto insurance in the past year, 33% of which
used the internet to get a quote.
l 66% of customers who were moderately
satisfied with their insurance company claimed
they would switch to a different carrier for a
lower coverage price.
l This year s study reflects the financial return
available to carriers for providing quality
service, Jeremy Bowler, senior director of the
insurance practice at J.D. Power.

4. Consumer Market Profile
l Generation X (born from 1961-1981)
l Generation Y (born from 1979-1994, composed of
60 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 Policies
l Actuarial inaccuracies: disparity between class and
usage levels.
l Economically inefficient insurance rates.
l No way of distinguishing repeat high-risk drivers from
those 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 mentality
l Low-mileage drivers with less-driven cars are unlikely to
be added to a policy.

6. Societal Benefits
l The implementation of mileage-based
insurance between 5¢ and 10¢/mile may
decrease 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 fatalities
and 200 injuries.

7. Societal Benefits
l Reduction in property damages.
l Reduction in traffic congestion by 15-25%,
along with road maintenance and taxes.
l Reduces fuel usage and CO2 emissions
by 13.5%

8. Mileage vs. Damages
• Institute for Traffic and Transport, Logistics and Spatial Development,
The Netherlands http://www.cedelft.eu/

9. Social Cost Analysis
Overview 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 Consumers
Mileage Fee Travel Reduction
1¢ -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 Savings
Low-cost, Low
mileage
$325
Average
motorist
$200
High-mileage May be
increased by
up to $100

11. But you may say…
l Insurers already provide benefits for low-
mileage drivers.
l How come insurance companies don’t
already use it?
l How will older cars accommodate needed
technology?

12. Pilot Projects
l General Motors and On-Star offers mileage-based
discounts to subscribers.
l Norwich Union - the UK s largest insurance company
worked with IBM to design a black box device.
l Progressive - Received a patent on it s Autograph
program introduced in Texas and TripSense in
Minnesota.
l Georgia- In 2003, introduced bill HB 201, enabling
insurers in the state to offer consumers a choice of
mileage-based insurance.
l Massachusetts and Pennsylvania

13. But would PAYD be Profitable?
l IBM states that on-demand business models constitute
the 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 of
premiums that would become distance-dependent.
l Would attract 25-50% of policies during the first few
years.
l Untapped low-mileage driver market

14. Implementation
l Trip Sensor, a free device that plugs into the
On-board Diagnostic port (OBDII) found near
the steering column in almost all 1996 models
l GPS Tracking- currently has 2 million customers
Gm has reported that they will double the
number of vehicles equipped with the OnStar
in-vehicle communications system by 2006 due
to customer demand.
l Tag or computer chip which transmits current
odometer readings.

15. State Legislation
l 63% of states reported that nothing in their
legislation prohibited PAYD.
l In New York, all authorized insurers must
file their motor vehicle insurance rates with
the Superintendent of Insurance.
l In West Virginia, residents have to be
insured at all times.
l Michigan requires an upfront statement of
the premium charge.

16. Incentives
l Oregon State passed bill HB 2043 in April
2003, offering insurers tax credits of $100
for every PAYD policy sold.
l Congress pay pass a bill providing $15
million a year for PAYDAYS (Pay-As-You-
Drive-and-You-Save) Grant program.
l Funding provided by the Congestion
Mitigation and Air Quality Improvement
Program.
l EPA’s green stamp of approval

17. Barriers and Limitations
l Requires insurers and brokers to change how they
calculate premiums; develop new procedures and modify
existing computer programs.
l Makes premiums and insurance revenues less
predictable.
l High cost of proper monitoring.
l Consumers are not informed of the product, and are
worried about privacy.
l No data to prove whether PAYD’s equity would be
profitable.

18. Questions ?
l http://marketplace.publicradio.org/play/
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