Introduction

The FCA recently approved By Miles, a ‘pay as you drive’ (PAYD) insurance distributor, adding to the growing number of firms looking to provide more relevant and timely insurance products to their customers. This provoked two questions:

1) Will insurance based on usage be more popular with the modern consumer than insurance based on driving behaviour i.e. pay how you drive insurance (PHYD)

2) Will PHYD insurance remain confined to the niche segments of the personal motor market?

Looking backwards

One possible reason that PHYD insurance policies remain confined to these niche segments could be the fundamental flaw that affects us all – overconfidence. The extent of this overconfidence bias was highlighted by a study which found that 77% of Swedish drivers believed they were a safer-than-average driver. This, of course, is impossible [1].

Worse still, it appears our confidence is not deflated even when experience tells us otherwise. Another study found that confidence levels amongst those who had been involved in an accident that led to hospitalisation were as high as the ‘non-accident’ control group [2].

Surely then it is not surprising that potential customers are not receptive to a proposition that monitors how they perform? If we are so assured of our skill, why do we need to prove it to anyone or receive feedback?

Industry experience tells us, however, that overconfidence is not a brick wall to PHYD insurance adoption. Indeed, those paying the highest premiums tend to overcome this adversity to monitoring in exchange for large premium discounts. Unfortunately, my perception is that the pound note discounts available to lower risk segments are not attractive enough to allow continuous monitoring of their driving habits and, therefore, mass market adoption of PHYD policies.

Looking forwards

Despite our hubris there is real potential for the pay as you drive (PAYD) insurance market to grow significantly. Indeed, the following changes to customer attitudes should support this model:

1) The average annual mileage of a household car has fallen by c.15% since 2002 [3]

2) The sharing economy has made customers more conscious of the (opportunity) cost of under-utilised assets (e.g. cars, property etc.)

3) Payment models are changing e.g. the ‘subscription economy’

4) Increasing number of short-term car rentals (e.g. Zipcar). 

Some InsurTech firms have developed products that recognise these changes to customer expectations. Cuvva, for example, in developing their latest product have recognised all four points, creating a short-term subscription product for infrequent drivers who want the costs associated with their vehicle linked to the amount of time the vehicle is on the road.

Is there a ‘third way’ for PHYD insurance?

To my mind, there are two ways that PHYD could realistically become mass-market:

1) Intense gamification – intense gamification combined with regular ‘freebies’ may achieve the goodwill required to allow monitoring and premiums to vary based on driver behaviour. 

2) Positive reinforcement only – offering a ‘carrot’ without the ‘stick’ could have a positive impact on changing driver behaviour as it will not offend our overconfident position. Indeed, this is exactly what By Miles are intending to do, advertising that they are a PAYD insurer… and they give you a discount if you drive well.

Commercial motor will be different

Commercial motor will behave very differently. We already know from the RAC that 85% of truck and 66% of van fleets have some form of telemetry [4]. The majority is used for track and trace purposes but employers are greatly incentivised to improve their drivers’ behaviour on the road from a brand and insurance cost perspective. It is because of this alignment in incentives between the insurer and commercial client that PHYD policies stand a chance. The challenge for insurers in this market is to persuade their clients that sharing driving data with them will be in their best interest.

Our experience

Grant Thornton have a wealth of experience helping insurance clients with their strategic decisions and transformation projects. If you would like to discuss this article further or perhaps the future of general insurance more generally, please contact Stuart Riddell (Stuart.w.riddell@uk.gt.com) or myself (Samuel.c.church@uk.gt.com).

References

[1] Svenson (1981)

[2] Preston and Harris (1965)

[3] Department for Transport (2017)

[4] RAC (2016)