Almost every insurance company is currently working on providing pay-as-you-drive insurance. Some already have succeeded in launching it, while others are busy preparing to go to market.
Insurance based on driving behavior can be very attractive for both the insurer and the insured. By adjusting his or her driving behavior, the insured can significantly reduce premium costs while the insurer can benefit from reduced risk and damage. Pay-as-you-drive also is advantageous for high risk drivers, such as young people, providing an opportunity to reduce the high premiums they’re required to pay.
In setting up pay-as-you-drive insurance, the insurer must determine the amount of influence it will exert over the driver and the amount of influence the driver will accept. There are primarily three levels of influence:
- Pay-as-you-drive: Based on the number of miles (kilometers) traveled
- Pay-how-you-drive: Based on driving behaviors, such as speed, braking, etc., and related conditions, such as traffic and weather
- Manage-how-you-drive: Based on both miles driven and driving behavior/conditions, with feedback provided to the driver
Manage-how-you-drive has the greatest impact on costs and risks. It provides drivers with direct insight into their driving behavior and the costs incurred via an app. This app encourages drivers via gamification to take fewer risks. They can, for example, earn extra points with good driving behavior, and points earned can be shared through social media and followed via a leaderboard.
Driving behavior alone?
Driving behavior, alone, doesn’t impact the risk of damage. Exceeding the speed limit, for example, without any additional factors will not directly lead to an increased risk of damage. Instead, driving behavior combined with other related conditions, such as traffic and weather conditions, should be evaluated.
There are many sources of data available—for purchase and for free—that can be used in assessing road, traffic and weather conditions, as well as vehicle characteristics. This data combined with data about the driver and his or her driving habits will provide a more accurate picture of risk.
Driver risk profiles
How do you pull together all of the available data to form a driver risk profile? This is the core work of an insurer, and it’s always been the job of the insurance actuary. The only difference between classic insurance and today’s pay-as-you-drive trend is the amount of available real-time data. With this data, it’s possible to assess risks more precisely.
It’s also possible to better identify risks by combining collected driver behavior and driving conditions data with claims management data, analyzing this broader mix of data with big data tools to gain actionable insight.
With a better picture of risks through a wider pool of data, the policyholder pays only for the actual risks he or she takes, and everyone has the choice to pay more by taking on more risk or to pay less by reducing risks. In turn, the insurer is able to offer the most competitive rates.
Some pundits say monitoring driving behavior will soon be a thing of the past, with the emergence of self-driving cars on the horizon. I believe this is a misrepresentation. Even as self-driving cars begin to emerge, I think it will be some time before consumers accept a model without a steering wheel and pedals. The self-driving function will work like cruise control; every driver will have the option of turning it on or off. If a driver chooses to keep it off, that, in and of itself, is driver behavior that can be monitored and used to assess risk. Those who drive with it off are assuming more risk.
CGI is involved in developing pay-as-you-drive and vehicle monitoring solutions. We’ve developed an app that monitors fuel consumption, CO2 emissions and maintenance costs, which has been piloted for a large transport provider and a major European city, and that can be modified to monitor specific driver behaviours. We also are partnering with Baseline Telematics to deliver an innovative pay-as-you-drive solution.
To learn more about our work and to discuss your specific need, feel free to contact me.
About this author
Director of Consulting
As an expert and thought leader on optimized insurance rating, CGI’s Piet Hein works with insurance companies to develop and implement effective rating strategies and solutions. Insurance rating is changing with the speed of the Internet. Usage-based insurance, behavioral-based insurance, Internet of Things, risk-based pricing, ...