What is PAYD Vehicle Insurance?

PAYD in BC Backgrounder

Pay-as-you-drive (PAYD, also known as distance-based, usage-based, usage-based and per-mile) vehicle insurance means that premiums are based directly on the amount a vehicle is driven during the policy term, so the more you drive the more you pay and the less you drive the more you save.

This changes the unit of exposure (how premiums are calculated) from the vehicle-year to the vehicle-kilometer. Existing rating factors are incorporated so higher-risk motorists pay more per kilometer than lower-risk drivers. For example, a $400 annual premium becomes 2¢ per kilometer, and a $2,000 annual premium becomes 10¢ per kilometer. An average motorist would pay about 6¢ per kilometre.

Current insurance is like an all-you-can-eat restaurant pricing, which gives customers an incentive to maximize their consumption in order to get their money’s worth, and must be expensive to recover the resulting high costs. PAYD is like al-a-carte restaurant pricing in which customers only pay for what they consume, so can save money.

PAYD pricing gives motorists a significant new incentive to reduce mileage, approximately equal to a 50% fuel price increase, but it is not a new expense, simply a different way of paying an existing fee. Motorists who drive average annual mileage pay the same as they do now, but those who drive less save money, reflecting the claim cost savings resulting from reductions in mileage and therefore crashes. Based on experience with similar vehicle price changes, PAYD pricing is predicted to reduce affected vehicles’ annual mileage by 10-15%, consisting of lower-value vehicle travel that they value less than the per-kilometre savings.

PAYD insurance has been widely studied by economists as a way to increase efficiency, fairness and affordability. It redefines insurance affordability; with current pricing affordability requires lower-risk drivers overpay their actual insurance costs in order to keep premiums affordable to higher-risk drivers. PAYD charges motorists their true crash costs, up to 30-cents per kilometre for higher-risk drivers; drivers limit their mileage to what they can afford, as with most other goods. This gives higher-risk drivers a significant new incentive to drive less, making roads safer for everybody.