Pay As You Drive Car Insurance explained

Pay as you drive car insurance is a relatively recent introduction to the product portfolio of some insurance companies. The basic assumption behind this product type is that the less a policyholder drives, the less they will pay in insurance premiums.

One of the fundamental principles of car insurance statistics is that bad things are more likely to happen when a car is driven than when it is stationary. The pay as you drive car insurance products offer a price structure that measures and reflects this reality.

Policies of this type operate on the basis of the more the policyholder drives, the more they are at risk and therefore the more they should pay in insurance premiums. Conversely, those people who drive less are less likely to have an accident and their premium payments should typically be lower as a result.

So how does it work?

The insurance companies offering this type of policy will typically give the policyholder a small Global Positioning System (GPS) box for installation into their vehicle. This GPS will link via satellite communications directly to the insurance company’s computer systems. The GPS will automatically provide them with the all information they need about the driver’s usage patterns. As an example, it will tell them the time the car is being driven, for how long, where, and on what types of road such as motorway or dual carriageway etc.

The insurance company then uses the actual information obtained about the usage to work out the risk and thereby, the premium that the policyholder will need to pay at the end of the next, normally monthly, period.

As examples, many insurance companies regard night driving as higher risk than daylight driving and they will price this more highly in their bill. They will also regard some types of road riskier than others and, for example, may well price mileage done on motorways as lower risk than driving done on standard roads.

This type of insurance typically contains two components. The first part relates to insurance for the car when it is not being driven and covers things such as theft, vandalism and other accidental damage done to the car by someone else - in effect what many people would term ‘third party insurance’. To understand and price appropriately, the insurance company will still need to know about where the car will normally be kept and in what conditions such as on or off street parking etc. Other information relevant here is the type of car, the claims history and any driving convictions.

This in effect is the fixed part of the insurance premium and will be payable even if the car is not used in that month. These components of the ‘stationary insurance’ part will not be affected at all by the GPS figures.

The second part of the insurance relates to the variable component – in other words where, when and how the policyholder is driving. This is where the GPS is used and how total premium payments are derived.

In some cases pay as you drive insurance could help reduce the annual premium considerably. As most insurance companies may typically calculate their premiums based in part upon the assumption of an annual mileage of 11,000 miles, drivers that do less than this ‘in reality’ may benefit. Drivers using their vehicle mainly for daytime driving on motorways and with lower mileage may also benefit. For many drivers it may be advisable to analyse carefully their normal car usage before a cost comparison between this insurance and other types can be made.