14 September 2022

Pay-As-You-Go: A New Horizon for Embedded and Personalized Insurance

Insurers want painless distribution. Customers want personalization. Both insurers and customers want coverage that addresses actual risks in an appropriate way.

Pay-as-you-go (PAYG) insurance offers a solution that brings insurers and customers together. By combining the ease of embedded coverage with the focus on personalized insurance, PAYG insurance models are changing distribution — and benefiting both insurers and their customers.

Embedded + Personalized = Pay-As-You-Go

The rise of digital tracking tools has created opportunities for pay-as-you-go models. “Pay-as-you-go insurance falls under the umbrella of usage-based insurance, which uses telematics to track how a person drives and then either reward or penalize them in the form of discounted or higher premiums,” writes Joel Kranc in an article for Driving.ca.

Unlike traditional telematics, PAYG coverage focuses on how much a vehicle is driven, rather than how the driver handles that vehicle. Whether charged by the mile or by the hour, PAYG insurance “means you’ll be charged specifically based on how far or how long you drive,” rather than on driving behavior, writes Forbes contributor Tim Heming.

By tracking fewer variables, insurers can offer a more transparent insurance model to customers. Customers can also drive with confidence that their insurance coverage is there for them when they need it — and that they aren’t spending money on insurance when they don’t need to do so.

PAYG insurance is already being offered by some insurtechs and established insurers in certain locations. The field remains open for insurers to explore embedded PAYG insurance models as well.

With embedded PAYG coverage, customers will purchase the vehicle and the insurance together. Vehicles may come equipped with the necessary telematics tools. Insurers and automakers can collaborate to ensure the necessary telematics provide the information insurers need to deliver effective coverage.

Realizing a Pay-As-You-Go World

PAYG insurance allows embedded coverage technologies, telematics and customers’ demand for personalization to intersect in valuable ways. Still, challenges do remain for insurers.

One question common among insurance customers is whether PAYG insurance meets their state’s auto insurance requirements. Another is whether PAYG insurance offers additional coverage, such as comprehensive and collision coverage.

Insurers experimenting with PAYG models often take state auto insurance minimum requirements as a guide. Yet the gap between states’ minimum requirements and the coverage customers want can be a large one.

“Don’t bet on receiving collision and comprehensive coverages,” AutoInsurance.org editor-in-chief Mathew B. Sims warns readers. However, Sims notes, customers may benefit from asking their carrier or agent about expanded coverage.

Expanded coverage can be a challenge for PAYG carriers. Pay-as-you-go insurance focuses on the risks associated with the vehicle when it’s in use. As a result, policies currently focus on liability and injury coverage stemming from auto accidents and traffic mishaps.

Many comprehensive and collision claims, on the other hand, arise when a vehicle is not in use. A tree may fall on the vehicle as it sits in a driveway, for instance. With PAYG coverage only, the tree-crushed vehicle has no insurance when it’s not in use. Since most homeowners insurance policies won’t address this type of damage, the vehicle’s owner may have little recourse.

To overcome this hurdle, insurers will need to develop flexible policies that cover driving-related risks while the vehicle is being driven and parking-related risks while the vehicle is parked. As PAYG insurance develops, customer interest in this form of coverage will develop as well.

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