What is PAYD Vehicle Insurance?

Pay-as-you-drive (PAYD, also known as distance-based usage-based, usage-based and per-mile) vehicle insurance which means that premiums are based directly on the amount a vehicle is driven during the policy term: the more you drive the more you pay and the less you drive the more you save (Greenberg 2013). 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 $1,600 annual premium becomes 8¢ per kilometer. An average motorist would pay about 6.4¢ per kilometer.


PAYD pricing gives motorists a significant new incentive to reduce mileage, approximately equal to a 50% fuel price increase, but 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 provided by reductions in mileage and therefore crash risk. 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-kilometer savings.


PAYD insurance has been widely studied by economists as a way to increase efficiency, fairness and affordability (Bordoff and Noel 2008; Edlin 2003; Greenberg 2013). It redefines insurance affordability; with current pricing affordability means that even higher-risk, lower-income motorists can afford basic liability coverage, which requires cross-subsidies from lower- to higher-risk motorists, with PAYD, affordability means that motorists limit their mileage to what they can afford, as with most other goods.


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