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PAYD Still Can’t Get Off The Ground

Chad Mitchell
Insurance Experts' Forum, December 16, 2009

INN's Bill Kenealy wrote last week how the NAIC declined the opportunity to standardize rules for pay-as-you-drive (PAYD) insurance policies nationally. Efforts to regulate PAYD insurance policies will remain the province of the states.

No group seems to deny the fact that PAYD is good for the environment and consumers. PAYD policies, which charge drivers by the mile, are viewed as environmentally friendly for reducing the number of miles motorists drive.

Consumers (e.g. paying customers) love the idea of PAYD. A Forrester Research survey found that 41% of online U.S. consumers with auto insurance are interested in a policy where premiums are determined by driving behavior, such as mileage or driving carefully. Two-thirds of these interested consumers say they would likely buy a PAYD policy.

Our data goes on to show that more than three-quarters of interested drivers say that the potential savings are what interests them about a pay-as-you-drive policy—this is by far the most common motivator (see Figure 1). Half say their interest stems from the idea of being rewarded for the low mileage they currently drive. The feeling of control sparks interest for one in three U.S. drivers.

How can such an intuitive and innovative program as PAYD not be adopted by more states or backed by regulatory groups?

Detractors cite consumer privacy issues as one of the primary reasons PAYD is not implemented in more states. Yet that argument is quickly diluted when you evaluate the current technology already used in cars and consumers’ daily lives.

OnStar is the popular driver-assistance technology marketed in many General Motors vehicles. The service allows customers to get driving directions and contact a live operator to get roadside assistance among other things. OnStar is a paid subscription service, and it includes a GPS component allowing General Motors to track the vehicle.

Additionally, more than 88% of U.S. adults now own a mobile phone. And a growing percentage of those phones offer GPS functionality. Services like AT&T’s Navigator offer mobile phone users voice and GPS-enabled driving directions directly through the mobile phone. AT&T monitors the geo-location of an individual and their vehicle through the mobile device.

Why is privacy not an issue with these services? The insurance industry continues to hide behind risk and consumer privacy instead of approving customer and carrier friendly innovation. There is no greater risk or privacy concern that General Motors faces versus a major carrier. Yes, the customer’s driving behavior could be tracked and a hacker could find other personal information. Identify theft happens anywhere, and firms like Progressive have invested in PAYD technology that ensures the highest level of security for the consumer.

Customer loyalty and retention are major barriers for insurance carriers today. The constant switch and save message encourages defection. MyRate from Progressive, and other PAYD drivers, seem like a logical fit to reduce attrition by rewarding conscientious drivers. I hope the NAIC and individual state insurance commissioners follow California’s lead to approve PAYD, serve customers and help manage risk through this proven technology.

Do you agree or disagree?

Chad Mitchell is a senior analyst with Forrester Research. He covers mobile and social media strategies in insurance, acquisition, cross-sell and retention marketing strategies, comparative raters, online guided selling tools, emerging Web and call center technologies for sales and service, agent portals for marketing and underwriting, and the best practices of leading multichannel firms. Additionally, he advises leading insurers on best practices for public and secure insurance Web sites—analyzing functionality for quoting, policy administration and claims.

Comments (1)

The 59% of respondents who are opposed to PAYD often view PAYD as a cost shifting initiative. Risks are greatest in highly congested urban areas where people drive short distances to work, often park on the street and have a higher rate of crime. They are more likely to experience damage or theft than those who live farther from the city and drive farther to work, but have a lower overall risk of damage or theft. PAYD does nothing more than shift the cost of auto insurance to those who are least likely to incur a loss.

Posted by: Valerie R | December 17, 2009 10:48 AM

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