As the cost of living crisis continues to bite, the idea of paying car insurance premiums that more accurately match driving habits has become more popular. In this article, we discuss this concept, and what it could mean for your premiums.
The Irish insurance industry is often maligned for its high premiums and lack of consumer choice. From these grievances often come calls for new products and services that offer perceived ‘fairer’ premiums and offerings that mirror those available in the UK and USA.
A frequently suggested product in this ilk is ‘pay-as-you-go’ car insurance, whereby customers are charged based on their actual driving mileage, rather than estimated usage.
In this article, we break down what ‘pay-as-you-go’ insurance is, who it could be suited for, and its pros and cons.
What is ‘pay-as-you-go’ car insurance?
Standard car insurance policies usually base part of the premium calculation on estimated mileage, to account for the increased likelihood of an accident the more miles driven.
However estimated mileage is only an estimate, and actual driving behaviours may result in policy holders paying for more than they need.
‘Pay-as-you-go’ insurance offers a different model, whereby premiums are based on actual mileage. This could result in lower premiums for those people who do very little mileage, such as the elderly, learner drivers, or those in very built-up areas.
Insurance products that cater for those demographics exist in other markets, such as the UK and USA. For example, UK insurance provider JURNY offers a pay-by-the-mile product, with a small monthly charge to cover the vehicle while parked. Its policy is specifically targeted at low-mileage users, such as hybrid workers and recreational drivers.
No such equivalent exists in the Irish market currently.
What are the potential benefits?
Fairer premiums
The idea of paying for exactly what you drive is an appealing proposition - correlating your actual driving habits more closely with the actual premium you pay.
This is especially true for those aforementioned groups that drive sporadically or for minimal mileage.
For example, someone who uses their car once a week to go shopping will potentially use far fewer miles than the estimated amount on their policy, resulting in them paying for more insurance than they may require.
A ‘pay-as-you-go’ product would charge this customer for just these journeys, as well as a likely parking fee to cover accidents and burglary when the car is parked. This could potentially result in this customer receiving a lower premium.
For commuters, with hybrid working becoming the norm, and increasing numbers of people using public transport, the demand for a ‘pay-as-you-go’ insurance plan may grow as people reduce car usage.
Such an insurance policy could also allow easier carpooling, for example, as multiple people can be insured on the same vehicle and pay for simply the mileage they use.
Moreover, a ‘pay-as-you-go’ policy may encourage a further reduction in miles driven, as the owner of a policy would be aware that they are being charged for each mile they drive. As such, this could inadvertently incentivise walking, cycling and public transport usage - reducing both emissions and traffic.
Ease of implementation
Implementation of ‘pay-as-you-go’ insurance should be fairly straightforward, with a device being added to the car that can track mileage. This could be as simple as a small thumb drive installed into the power outlet or cigarette lighter.
Furthermore, existing black boxes and telematics devices already have the technology to facilitate such tracking, in addition to monitoring driving behaviour.
For those confident in their driving habits and behaviour, combining ‘pay-as-you-go’ insurance with telematics insurance could lead to extremely personalised premiums, that charge based on driving style and mileage. Such a policy could be deemed ‘fairer’ than being added to the wider risk pool.
Could there be any drawbacks?
Change in habits
While a ‘pay-as-you-go’ policy may be useful for certain demographics with specific habits, any change in behaviour could result in massively increased premiums.
For example, if you have budgeted for your insurance to only account for a weekly shopping trip, but a change in your work or personal life requires more driving, your monthly premium could massively increase.
The impact of this depends massively on the pricing model chosen by the insurer. Depending on implementation, ‘pay-as-you-go’ may not result in a cheaper policy for many in the long run, as fluctuations in mileage occur.
While estimated mileage may not always be the most accurate measure of driver behaviour, it does provide a safety blanket for unexpected changes in mileage.
Existing alternatives
For those who drive very infrequently, say less than once a week where public transport isn’t available, some alternatives to a standard insurance policy already exist.
Rather than paying road tax, maintenance and other costs associated with car ownership, drivers in this usage bracket may find services such as GoCar are able to cover these trips.
GoCar is a service offering car sharing, allowing customers to hire a car for as little as an hour through its app. This service is also inclusive of insurance and fuel, and may be cheaper for occasional drivers.
When taking this into account, the demographic that would actually get best value from a ‘pay-as-you-go’ policy is relatively small. As such, the impetus for insurance firms to introduce such a product is reduced.
Increased car ownership
While ‘pay-as-you-go’ may open up the possibilities for reduced car usage and easier carpooling, it could also lead to people holding onto vehicles they potentially don’t need.
If a driver is weighing up the value of using their car for small, low mileage journeys over taking public transport or walking, ‘pay-as-you-go’ makes it more feasible to hold onto a vehicle. This could inhibit the rate at which cars are being taken off the road, a key environmental target.
It could also incentivise second car ownership, as the cost of having a seldom driven car is drastically reduced. For people with a car they only drive in the summer for example, ‘pay-as-you-go’ insurance could offer great value.
Therefore, while ‘pay-as-you-go’ insurance could lead to lower premiums for certain demographics, it may be at odds with wider societal goals.
Summary
On the face of it, ‘pay-as-you-go’ car insurance opens up the possibility of fairer premiums for drivers with very low mileage, such as the elderly.
Such a payment model would be relatively easy to implement, and could encourage positive behaviours such as carpooling.
However, it could be potentially unforgiving on drivers whose habits change, and may not necessarily offer the best value for money for certain types of infrequent drivers. Additionally, it may not align with climate targets linked to car ownership.
Overall, the potential for ‘pay-as-you-go’ to enter the Irish market is limited by these drawbacks, despite the potential for such policies to benefit certain niche demographics.
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