The insurance industry is undergoing a massive transformation, driven chiefly by ever-evolving customization demands and the access and ability to process huge data sets to meet these demands. “Pay as you drive” (PAYD) insurance, also known as usage-based insurance (UBI), is a type of tailored comprehensive automobile insurance where the premium payable is on the actual usage of the vehicle, either in kilometer terms or on driving behaviour.
It’s a cost effective solution to reduce yearly vehicle insurance premiums and is suitable for urban dwellers who travel less in terms of mileage or those with multiple vehicles. Insurers implement different PAYD models, with some setting an annual mileage limit with corresponding premium tiers, while others let users ‘pause’ their policy on non-driving days, earning bonus days for each paused day.
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Integration with generative AI makes it possible for insurance companies to offer these customized insurance solutions since data collection and analysis from several sources becomes easier. It involves using innovative technology to keep track of the driving habits and usage of the vehicle to arrive at the own damage discount (OD) that insurers deduct from the final premium payable.
Since this type of insurance provides you with the option to reduce vehicle insurance costs based on lower usage, it is also referred to as drive-less-Pay-less insurance.
How Pay As You Drive Insurance Work?
To avail a “Pay As You Drive” or PAYD car insurance, the buyer has to declare the anticipated kilometers the vehicle will cover during the policy period, which is usually in slabs. The premium charged is based on the number of miles driven during the policy term and the driving behaviour, which is verified from smart devices installed in the car.
Based on the vehicle’s usage and kilometers driven during the policy year, the insurer provides a discount on the OD premium amount which can go up to a maximum of 25%.
But one important issue that policyholders should be aware of is that if the pre-specified kilometer slabs are exceeded during the policy term, insurers retain the right to repudiate any claim. But at the same time, users can pre-empt having to face such an unfortunate situation by exercising the option to enhance or top-up the kilometers used or shift to regular vehicle insurance coverage.
Let us look at the key features of PAYD in brief.
| Car Usage Slabs (Mileage) | Discount on OD Premium |
| 0 – 2,500 kms | 25% |
| 2,501 – 5,000 kms | 17.5% |
| 5,001 – 7,500 kms | 10% |
| 7,501 – 10,000 kms | 5% |
| More than 10,000 kms | 0% |
What are the Key Features of PAYD?
- Mileage-Based Premiums
The insurance premium is primarily based on the number of miles driven. Lower mileage can result in lower premiums.
- Smart Tracking Devices
Insurers often use a mix of intelligent tracking aids like telematics devices, onboard sensors, or GPS-assisted gadgets to monitor and track driving behaviour and mileage. Data is collected from devices installed in the car or as part of a mobile app.
- Flexibility
Some insurers allow policyholders to switch their coverage on and off based on usage, which can lead to additional savings. For example, with the Digit Pay-As-You-Drive plan, if the coverage is turned off for a continuous 24-hour period, policyholders can earn bonus days that translate into discounts.
- Driving Behavior Monitoring
Some PAYD plans also take into account driving habits such as speed, braking patterns, and the time of day when the vehicle is driven.
- Cost Savings
Drivers who drive less or who drive more safely can see significant savings on their insurance premiums. Many insurers offer further incentives for low mileage. For instance, if a policyholder drives less than 15,000 km per year, they may receive extra discounts on their premiums, with some companies offering up to 85% off for those driving under specific thresholds.
- Environmental Impact
PAYD insurance can encourage less but more conscious driving, helping reduce traffic congestion, accidents, and environmental pollution, making roads safer and cities pollution-free.
Pros and Cons Of Pay-As-You-Drive Insurance Covers
The advantages of PAYD insurance are:
- Cost-Efficiency: Lower premiums for low-mileage drivers.
- Incentives for Safe Driving: Encourages safer driving habits.
- Personalized Rates: More accurate insurance rates based on actual usage.
The disadvantages of PAYD insurance are:
- Privacy Concerns: Continuous monitoring of driving habits may raise privacy issues.
- Potential for Higher Costs: High-mileage drivers or those with poor driving habits may end up paying more.
- Device Installation: The need to install a telematics device can be inconvenient.
Is PAYD Insurance Right for You?
PAYD insurance may be a good fit if:
- You drive infrequently or have a short commute.
- You have safe driving habits and are willing to have your driving monitored.
- You’re looking for ways to lower your insurance premiums.
- You are environmentally conscious and want to reduce your driving.
How To Buy PAYD Insurance?
Buying a PAYD insurance cover, or, for that matter, any vehicle insurance, is easy nowadays, with several options available both offline and online. The easy way is to visit the website of any general insurance company and buy the same by providing a few details like registration number, name, and address.
I generated a quote for a Maruti car on the online website of one of the insurers, HDFC Ergo, and the process was easy and similar to buying any vehicle insurance. The only difference to the normal buying process is that you just have to express your interest in the pay-as-you-drive coverage option, and after 15 days of policy issuance, odometer readings would have to be shared on their self-inspection app. This reading would form the basis for calculating the validity of the PAYD coverage and the claim benefit amount eligible at the end of the policy tenure, usually one year.
Post acceptance of the terms and conditions and payment of the premium, the insurer’s local office will get things moving. They might visit your place to install the telematic trackers and check the odometer readings. Once the policy is approved, download it and drive away to sunset!
How Is PAYD Insurance Cover Different from Traditional Comprehensive Insurance?
Vehicle insurance is a mandatory and essential requirement to cover any financial loss arising out of accidents, theft, etc. of your vehicle, providing peace of mind. PAYD insurance is a specialized new age benefit cover that you can use to optimize your financial outgo on premiums payable in comparison to normal vehicle insurance costs.
Let’s look at the differences between a normal vehicle insurance policy over a PAYD coverage policy.
| Criteria | Traditional Comprehensive Cover | PAYD Cover |
| Premium Payable | Depends on the premium’s decided for the particular amount (IDV) and year of purchase | While PAYD premiums are based on the predetermined agreed upon usage cover (Kms) between the buyer and the insurer |
| Claims | Claims allowed within the duration of the policy, irrespective of usage | Claims are only valid within the opted-for kilometer range |
| Customized | Limited customization allowed based on the declared IDV, additional covers opted for. No option to reduce premiums based on usage and good driving habits | Complete customization allowed as premiums can be reduced upto 85% based on opted-for kilometer and usage behaviour. |
So Does PAYD Insurance Really Make a Difference?
Pay-as-you-drive insurance offers a flexible and potentially more affordable option for many drivers. By aligning insurance costs with actual vehicle usage, it provides a fairer pricing model and encourages safer and more responsible driving behaviours. However, it’s important to weigh the benefits against potential drawbacks like privacy concerns and the practicality of telematics devices.
Moreover, it should always be kept in mind that usage tracking is something that should not be ignored at any cost, since it might prove costly at the time of any claim.
Otherwise, pay-as-you-drive insurance coverage is an excellent add-on option to save money and improve driving habits and behaviours. In that sense, it does make a difference!