Mileage-based insurance vs Pay-As-You-Drive Insurance - What you should know

In the realm of usage-based insurance, there are two prominent models: mileage-based insurance (MBI) and pay-as-you-drive insurance (PAYD). While these terms are often used interchangeably, they represent distinct approaches with unique characteristics and implications. This article explains the differences between mileage-based insurance and pay-as-you-drive insurance.

Mileage-Based Insurance: Simplicity and Focus on Distance

Mileage-based insurance hinges on the premise that the less one drives, the lower the insurance cost. It operates under a straightforward metric: the total miles driven within a given period. The core assumption is that reduced mileage correlates with a lower probability of claims, thereby justifying lower premiums. This model’s simplicity appeals to both insurers and policyholders, providing a clear and understandable structure. Insurers typically gather mileage data through odometer readings, telematics devices, or mobile apps that track distance. Premiums are then adjusted based on pre-set mileage brackets, with drivers who travel fewer miles paying less than those who drive more. Due to the simple value proposition, there are some tangible upsides for insurers. Firstly, the product is easy to understand, so potential policyholders can quickly understand the concept. Secondly, as it is only odometer readings that are monitored, policyholders have a tendency to feel their privacy is not compromised (vis-a-vis PAYD insurance policies).

Pay-As-You-Drive Insurance: Behavioural Data and Distance

In contrast, pay-as-you-drive insurance offers a more nuanced approach by considering not just the distance driven but also other objective KPIs that insurers' actuaries can use to calculate risk profiles. Pay-as-you-drive insurance leverages telematics to monitor various aspects of driving such as distance, speed, time of day, and can also include other datasets being incorporated like meteorological data. This model offers a richer and more detailed risk profile, which allows for assessment of risk by considering when and where a vehicle is driven. Consequently, premiums are adjusted, rewarding "safer" driving habits with discounts (i.e., actively reducing risk by driving at less statistically risky times, locations, etc.), while "riskier" behaviour results in higher premiums.

What Are The Core Differentiators between Pay-As-You-Drive Insurance and Mileage-Based Insurance?

The differences between mileage-based insurance and pay-as-you-drive insurance are subtle, especially in the scope of data collected and analysed. Mileage-based insurance focuses exclusively on mileage, which, while indicative of risk, does not capture the full spectrum of driving behaviour. Pay-as-you-drive insurance’s approach allows for a more precise risk assessment by integrating datasets that are indicative of risk, thereby offering more context which in turn can reward safer drivers and provide a more accurate premium calculation.

Technologically, pay-as-you-drive insurance requires telematics infrastructure capable of real-time data collection and analysis. For pay-as-you-drive insurance policies, this typically means a smartphone-based solution, though dedicated hardware that enables GNSS tracking and onboard diagnostics can also be used. This investment in technology enables insurers to provide more dynamic and potentially fairer pricing models. Mileage-based insurance, on the other hand, can function with simpler data collection methods, such as periodic odometer readings, making it a less complex and more straightforward option (though in such cases not strictly insurance telematics).

Considerations for Insurers

For insurers, choosing between mileage-based insurance and pay-as-you-drive insurance involves strategic considerations around technology investment, customer engagement, and market differentiation. Pay-as-you-drive insurance requires investment in telematics and data analytics infrastructure, but this can lead to more accurate risk assessments and reduced claims. In contrast, mileage-based insurance offers a quicker path to market with fewer upfront costs. Pay-as-you-drive insurance’s interactive nature can enhance customer satisfaction and loyalty by aligning premiums with individual driving behaviour, whereas mileage-based insurance’s simplicity might limit engagement opportunities but can still attract customers seeking straightforward and predictable insurance solutions.

Regulatory and privacy considerations also play a crucial role. Both mileage-based insurance and pay-as-you-drive insurance must navigate regulatory landscapes that vary by region, with privacy concerns being particularly pronounced in pay-as-you-drive insurance due to continuous data collection. Insurers must ensure compliance with data protection laws and build trust with customers regarding data usage and privacy. Mileage-based insurance’s limited data requirements simplify compliance but still necessitate transparency around data collection and usage. Pay-as-you-drive insurance insurers, however, must implement robust data security measures and clear policies to address privacy concerns, ensuring clear communication about data benefits and protections to build consumer trust.

The future of mileage-based insurance and pay-as-you-drive insurance will likely be shaped by technology (namely the availability of line-fitted in-vehicle connectivity), evolving consumer preferences, and regulatory developments. As telematics and data analytics continue to evolve, pay-as-you-drive insurance’s ability to offer personalised and precise risk assessments will strengthen. Mileage-based insurance may also evolve, incorporating more nuanced data points without fully transitioning to the complexity of pay-as-you-drive insurance. Emerging technologies such as artificial intelligence and machine learning could enhance pay-as-you-drive insurance’s predictive capabilities, making risk assessments even more accurate and dynamic, but this is not a feature to be expected in the near-term future.

Consumer demand for personalised and transparent insurance products is almost certain to grow, however, favouring pay-as-you-drive insurance’s detailed and interactive model. However, a segment of the market will continue to value mileage-based insurance’s simplicity and predictability, ensuring its relevance.

So Which is "Better": Mileage-Based Insurance or Pay-As-You-Drive Insurance?

While mileage-based insurance and pay-as-you-drive insurance share a common goal of aligning premiums more closely with actual usage, they diverge significantly in their approaches and implications. Mileage-based insurance offers a straightforward, mileage-focused model appealing for its simplicity, while pay-as-you-drive insurance provides a more comprehensive approach that rewards safe driving. For insurers, the choice between these models isn't that between "right and wrong," rather insurers need to fully understand what their target audiences want and need, and understand (by leveraging relevant, credible, and detailed business insights) in which programmes to invest, how to approach customer engagement, and how to frame their market positioning.

Both models have distinct advantages and can coexist, each catering to different consumer (and insurer) needs and preferences.