If you are looking for cheaper auto insurance, there is a new concept you should get to know. It's called Pay-As-You-Drive (PAYD) Insurance, and it bases your insurance premium on how many miles you drive. Whether or not you could benefit from it depends on your driving habits--and how much information you want to share with your insurance carrier.
Insurance underwriters try to determine the risk of having to pay a claim on a given policy. The premium for that insurance policy is determined by the risk--the higher the risk, the greater the premium.
There are many factors which determine the risk of an auto insurance policy--the driver's record, type of car, where the car is located, and how the car is used. You probably recognize some or all of these as facts which were requested on your insurance application. In turn, your answers helped determine the premium you pay.
Obviously, a fundamental factor which determines the risk of a car getting into an accident is how much it is driven. That's why the PAYD concept is to include mileage in determining auto insurance premiums--not all by itself, but in combination with other factors.
How PAYD Insurance Works
Already, some insurance carriers offer discounts for low-mileage drivers--the less you drive, the cheaper your insurance. This is typically based on broad categories of mileage. However, with the spread of GPS devices, it has become feasible to track a given motorist's mileage much more precisely.
As a result, auto insurance could become like a taxi cab meter, with every mile costing you a little bit more. Hence the expression "pay-as-you-drive."
What's Next: The Future of Auto Insurance
Some have theorized that GPS devices could radically change the way insurance is priced in the long term. After all, more than just mileage could be tracked. When and where you drive could also be monitored and factored into your insurance cost. Already, one insurance carrier has experimented with monitoring driver speed.
Since all of these factors help determine the risk of a given car and driver having an accident, they could all conceivably be used to determine auto insurance rates. You would end up with a highly customized rate based on your individual driver profile.
Pros and Cons of PAYD Insurance
If you get a Big Brother vibe from all of this, you are not alone. Some privacy advocates have cringed at the notion of letting an insurance company pinpoint your exact movements every minute of the day and night.
On the other hand, many motorists may feel that providing the information is worth it if it results in cheaper insurance. A study of California drivers by the Brookings Institute estimated that most would benefit from PAYD insurance. On the other hand, of course, these benefits would come at the expense of high-mileage drivers.
The Brookings Institute also theorizes that there could be other long-term benefits, as drivers are given an incentive to cut down on their mileage. These other benefits would include less gasoline consumption, less pollution, fewer accidents, and less wear and tear on infrastructure.
Whether or not the concept of PAYD insurance appeals to you, it is worth understanding. After all, it is a choice you may have to make in the near future.
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.
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