Research firm Frost & Sullivan says that 'pay-as-you-drive' (PAYD) insurance promises reduced emissions, lower insurance premiums and enhanced safety, in addition to the anti-fraud gains for the insurance companies that initially motivated its introduction.

Frost says PAYD is gaining increasing acceptance in Europe as it has significantly brought down insurance premiums for some drivers. PAYD was first introduced as a measure to reduce insurance fraud and having proved its insurance premium benefits for the end customers, the insurance companies are now emphasising the benefits of reduced emissions and improved road safety.

Certain sections of insurance customers, mainly low-mileage drivers and young drivers will be able to save up to 30 percent on the annual premium due to PAYD.

F&S also says that PAYD is predicted to reduce vehicle travel by a considerable degree, effectively reducing emissions and improving road safety. This may influence governments to provide certain tax discounts for insurance companies and customers adopting this payment method.

"PAYD reduces the risk for insurance companies by providing huge incentives for users altering their driving pattern positively, thereby reducing the risk of accidents and claims," notes Frost & Sullivan Research Analyst Mohamed Mubarak M. M.

"Moreover, PAYD enables insurers to calculate risk more accurately and this will help them to price the service aggressively."

However, developing region-specific tariff models for different customer segments is a major challenge for insurance companies and system suppliers. "Currently, certain insurance companies demand the customers purchase the hardware unit (telematics box) to avail of PAYD service," says Mubarak. "The high cost involved in purchasing such units is also a significant restraint for the uptake of PAYD services."

Going forward, the emergency call (eCall) voluntary agreement is expected to push vehicle manufacturers into integrating standard telematics hardware. This will provide a standard and an open platform on which various value-added telematics services developed and offered. The open telematics platform will standardise the data transfer methodology.

Other telematics services such as stolen vehicle tracking (SVT), remote vehicle diagnostics (RVD) and eCall can be packaged with the PAYD service and offered in the same telematics hardware unit, Frost says. This is a definite revenue-generating model, it maintains.