Praveen Chandrasekar, Team Leader, Telematics and Infotainment

In an age where consumer electronics and telematics is looking to add fillip to car brands, Pay As You Drive (PAYD), Norwich Union’s brainchild, is looking to ease the strain on car owner’s insurance bills using the novel concept. PAYD comes as one of the better cost-saving innovations that could well become an important cog in the telematics wheel. With features like stolen vehicle tracking, e-call, remote vehicle diagnostics becoming a key component of telematics systems these days PAYD is another GPS based concept that brings about commercial advantage to both the customers and insurance companies.

Insurance Companies are Pushing PAYD for the Flexibilities it offers – Driver Rules!!!

PAYD is a telematics based insurance concept which is based on three main pillars in relation to the driver – when they drive, where they drive and how often do they drive? PAYD is a consumer friendly concept where consumers can select the rate structure they prefer and the monthly premiums are calculated on the basis of the risk patterns of the driver (lower risk driving patterns yield lower rates per mile than higher risk driving patterns on the monthly premium).

From a consumer side the key driver for uptake of PAYD is the flexibility of the pay structure in PAYD and the benefits it offers like accident warning. Insurance companies are pushing for PAYD concept because of the innovative concept of calculating premiums based on driving habits, which is cost effective for the consumers and thus will help them attract consumers easily.

The traditional vehicle insurance schemes forced lower risk drivers to subsidize the higher risk drivers because of the fact that the insurance calculations were not based on driving patterns and habits. The pricing structure of PAYD restructures insurance in the sense that high risk drivers must now limit their miles driven to the amount of risk exposure that they can afford as per their insurance structure. This reduces high risk driving, thus reducing crash costs. Thus the PAYD insurance scheme is more suited to individual driving patterns and also encourages lower risk driving habits

Norwich Union is Leading the Market in UK Currently – Other European Countries are lagging

The PAYD insurance concept pioneered by Norwich Union (NU) uses a simple GPS device to track the location of the vehicle. The in-vehicle GPS unit allows NU to structure the insurance policy customized to the individual driver. Customers in the PAYD scheme will be billed and rated according to their monthly vehicle usage, including which time of the day people drive, what type of road do they drive on and the vehicle mileage. Itemized billing similar to mobile phone bills will be available for the customers – with the premium calculations for each journey and totaled.

TrafficMaster, the UK based leading supplier of traffic information signed a five year deal with NU to supply GPS black box devices to NU for the PAYD insurance scheme in October, 2005. In addition to the basic GPS black box, consumers will also have a raft of optional vehicle services available with this package, like safety camera warnings, Smartnav navigation, emergency and breakdown calls and stolen vehicle tracking from RAC Trackstar all available from TrafficMaster.

Designed specifically for drivers aged between 18-23, PAYD aims to reduce young drivers’ insurance premiums and also the number of accidents occurring at night since this age group is most prone to accidents and risky driving. One step ahead, PAYD also encourages drivers in this age group to leave their vehicles at home by charging policyholders £1 per mile during the high-risk accident time (23.00 – 06.00) and only 5p per mile during off-peak hours, with 100 free off-peak miles every month.

NU is aiming to have a total of 100,000 customers by the end of 2007 under the PAYD scheme in UK alone including the fleet market and personal cars (TrafficMaster already supplied NU with over 10,000 Black boxes for the first quarter of 2007). Consumers in UK have been able to realize savings of upto 40-50% in comparison to their earlier insurance premiums and also drive more safely.

Other than this effort in the UK by NU, only a few other companies are field testing their PAYD models in the other European regions. This includes in Germany an effort between the insurance company WGV and the telematics service supplier T – Traffic who have been field testing their PAYD model in Germany since January 2007.

Key Challenge is "EP0700009 Patent" – The Future of Pan European PAYD Projects Depends on the Auction of this Patent

The EP0700009 patent is the underlying technological and conceptual foundation behind the PAYD concept. This has been successfully developed and used by Norwich Union in the UK and subsequently the patent was up for auction for other European countries in a bid conducted on May 15th 2007. But the auction witnessed only a few bidders and thus did not yield any result. This is a setback considering that the patent is important for developing PAYD projects outside of UK especially in countries like Spain, Italy, Germany and France. Complexities involved in the entire PAYD concept and the lack of a solid business case are two major reasons many insurance companies are still discussing over the concept and a major reason for the low turnout at the auction.

Perceptions related to the consumers being watched at all times when they are driving and thereby affecting their privacy is a key challenge in the PAYD concept. Flexibility of change of insurance plans and the rate structure is another area in the PAYD concept where there is no clear direction. In total, even though PAYD is being actively pushed by insurance companies, there is no single killer business case evolving in the market because of a lot of market and technological challenges

Insurance companies which do not give importance to this patent and venture in PAYD projects stand at a risk of infringing patent rights and possible litigation consequences. Insurance companies in other countries must consider participating in the auction for the patent and sharing the rights with NU to develop PAYD projects in their countries. This is the best way forward for these companies to tap into the opportunities in the PAYD segment.

PAYD – Focus is on offering a Flexible Insurance Scheme for Customers

Telematics applications for passenger vehicles have witnessed yet another innovative value addition through the innovative GPS based PAYD concept. The PAYD pricing is structured in a way to encourage young drivers to adopt safer driving practices and also avoid using vehicles during times when traffic is dense. With PAYD concept offering real time benefits for consumers and gaining traction in the UK market, vehicle manufacturers and suppliers must look to market applications like Stolen Vehicle Tracking, Lane Departure Warning and E Call, which offer direct benefits to the customers and also has an impact on the vehicle insurance premiums. Pan European success of the PAYD concept depends on the sale of the patent in other countries. By 2015, Frost & Sullivan expects 5-10% of the cars in Western Europe to be equipped with a PAYD insurance system. This is in line expected to boost the uptake for other core telematics applications, thus moving telematics from a luxury product segment to a value added essential product segment.

This article is based on Frost & Sullivan’s upcoming research titled "Strategic Analysis and Implications of the European Telematics based PAYD Vehicle Insurance Market". This research will analyze the ideal business case for PAYD insurance scheme in Europe and the advantages derived through PAYD for an ideal Telematics package. For further information, please contact Michael Banks, Corporate Communications, on +44-(0)20-7915-7876 or michael.banks@frost.com