- Posted by Admin on October 20, 2009
Last week the California Office of Administrative Law approved the regulations needed to implement Commissioner Steve Poizner’s pay-as-you-drive concept. This removes the final regulatory barrier to PAYD in the Golden State, so now what? If the public is expecting a flood of new auto insurance options, it probably better hold on a little longer.
PAYD is one of those ideas that have great appeal across all spectra. It’s a way to encourage people to voluntarily drive less (fewer miles = less cost). Fewer miles driven means less gasoline consumed and fewer emissions, so environmentalists love the concept. Reduced consumption also means less reliance on imported oil. Then there’s the safety factor – less crowded highways should lead to fewer accidents, leading to fewer injuries and fewer deaths, not to mention lower costs. Only the lawyers are left on the sidelines. What’s not to like?
Well, nothing really. However, neither the companies nor the consumers are really ready for this quite yet. At least one company is up and running in Texas, founded and operating strictly on PAYD principles. Progressive has been running trial variations of PAYD for a number of years now. Further, there’s probably not an auto insurance company out there that is not looking into what PAYD will involve, so there definitely is interest on the part of the companies. There are some hurdles to overcome before they can make it happen, though.
Not the least of these gets back to the consumer. I’m not sure if George Orwell is as well known to today’s youth as he was when I was growing up, but the concept of Big Brother certainly is alive and well today. To put it bluntly, there is a fundamental distrust of giving out “private” information to someone as potentially intrusive as your auto insurance carrier. It’s kind of ironic that the same individuals who don’t want their insurer to know where they might be driving are relying on their car’s GPS to get to their next destination and buying cell phones with a cool GPS feature that, well, lets their service company know where they might be driving, among other things.
Kids see the potential “gotcha” factor, feeling they have another set of eyes looking at them, ready to catch them when they slip up or try to slip one by. Of course adult distrust of these systems probably goes deeper, getting well beyond the scope of this discussion. Big Brother is still the issue, but concerns take on a political overtone involving intrusiveness and personal rights. Maybe the lawyers will find a home in PAYD after all!
From the company perspective, there are practical considerations. No one other than Progressive has any amount of data to analyze, so putting together a PAYD program may largely be an act of faith, at least at first. And unless a company simply puts out a glorified mileage discount and calls it PAYD, it has some serious work to do in terms of data design and collection, since it will be dealing with rating features it has never before captured.
One of the biggest hurdles is how to get the data. In California this may not be the issue it is when PAYD begins to roll out in other states, since the regulations are restrictive in what can and cannot be used in rating. However, the day will come when a company wants to use a variable such as what time of day a car was driven and where, what type of road on which it was driven, how fast it was driven vs. the posted speed limit, aggressive driving tendencies, and other such features that get to the heart of the Big Brother concerns. There is no doubt that some of these will be shown to be strong loss predictors, and serious discussions will ensue as to what is fair for rating, and what is indeed intrusive.
To get the types of variables discussed above, data needs to be captured electronically (and it is available). This may eventually be available through the “black box” built into all vehicles currently, but there is no standardization as of yet. Therefore, today a third party device is needed to capture the necessary information. With a limited market, as you might expect, the cost is similar to the early versions of any other electronic device – too high to be viable for mass use. Plus there’s an additional complication that is ongoing – if these devices are going to transmit data, there will have to be a monthly service fee to some company that is able to receive, collect and summarize the data, and most importantly, do so in a secure manner while maintaining the privacy of each individual’s specific details.
As you can see, PAYD isn’t something a company can decide it will just start doing. There’s a lot to plan and get in place first, without knowing if the public will buy it. It is likely that PAYD will start out for most companies as an option, probably fairly basic in scope. Like everything else, it will evolve over time.
This optional approach may skew the relative experience between PAYD programs and traditional programs. Who is more likely to opt in at first, someone who feels he has something to gain because of his good driving habits, or someone whose driving leaves something to be desired, whether or not he has been caught or had an accident in the past? As a result, early PAYD experience is likely to look better than average, but this could be misleading if used to make generalizations.
Time will tell how PAYD evolves, but despite the hurdles to be overcome, chances are that it will evolve. New ideas often are greeted with skepticism before ultimately being accepted, and PAYD may be no exception. PAYD could significantly modify traditional auto insurance classification, but it could also work in conjunction with most existing rating variables. It also could lead to additional changes in the way auto insurance if rated. Companies compete today through innovation at least as much as they do through rates, and something as new as this could easily trigger more new concepts.
Whatever happens, we at Quadrant are aware of the changing landscape, and the fact that there are more changes to come. As companies innovate, we will make the necessary modifications along with them. We will be there for you to help you compete more effectively, with better tools and more complete knowledge