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Traditional conceptions of insurance are being challenged by new forms of risk, new service configurations, and critical customer demands.  The search for innovative yet practical business opportunities is driven by ever more competitive markets, and is supported by emerging technical platforms.
With our unparalleled mix of business knowledge and technical experience, we can help you investigate, develop, pilot and implement these opportunities.
We identified the opportunity for variable insurance policies several years ago, when carrying out a strategy study for a small UK insurer. We are pleased to note the current experiment into pay-as-you-drive by Norwich Union, although this experiment is fairly limited in scope.
Service-Based Business in Insurance (CBDi October 2003)

Constructing a Distributed Insurance Business from Building Blocks (pdf) (RMI December 2000)


veryard projects - innovation for demanding change

Variable Insurance Policies

veryard projects > industry sectors > insurance > variable policy

In my work with insurance companies, I have been working on a range of opportunities for insurance that varies dynamically with customer identity and behaviour. Most insurance policies involve a fixed transfer of risk from the customer to the insurer, for a fixed premium. That's all very well if you live a steady and predictable life, in a surprise-free environment. But most of us don't. Let's say you need car insurance for the next 12 months, or life insurance for the next 20 years. The insurance company or broker needs to assess the risk, and quite reasonably asks you lots of questions -- what you are going to be doing, where you are going to be living and working, how much driving, smoking, drinking and overseas travel you are going to do, and so on.  Often they simply ask you about your life now -- while reserving the right to cancel the policy or increase the premiums if any of these factors change.

Variable insurance policies, of which pay-as-you-drive is one example, allow the uncertainty on both sides to be reduced - although it's important that the charging basis be as simple and transparent as possible. Removing the mistrust overhead allows the relationship between insurance company and customer to become much more economically efficient, leading to reduced premiums for the customer and improved underwriting ratios for the insurer

There are important social and commercial enablers for this kind of arrangement, and a new set of risks that have to be negotiated. From the technology side, the key enablers seem to be the ability to collect and process much larger volumes of data, with reasonable levels of privacy and non-repudiation.

veryard projects - innovation for demanding change

The Economic Overhead of Mistrust and Uncertainty

veryard projects > industry sectors > insurance > mistrust

The insurance industry is currently carrying a vast mistrust overhead. Insurers base the calculation of premiums on the expected level of claims, and this level is increased by untrustworthy behaviour on the part of some insured parties (whether moral hazard or outright fraud). Untrustworthy behaviour represents a risk for insurance companies, which they manage in two ways. One is by trying to determine everything in advance (and writing exclusion clauses for things that they cannot adequately determine in advance, as they did with Y2K), and the other is by charging a higher premium to compensate them for untrustworthy customer behaviour. But this also penalizes trustworthy customers.

veryard projects - innovation for demanding change

Pay as you drive (PAYD)

veryard projects > industry sectors > insurance > payd

It is known that the risk of car accidents goes up if people drive for too long without a break, or too fast in residential areas. Instead of trying to classify drivers into responsible and irresponsible, and then fixing the insurance premium for the year, why not simply charge drivers more whenever they drive irresponsibly, and less when they drive responsibly. Pay As You Drive (PAYD).

The simplest form of Pay As You Drive bases the insurance costs simply on the number of miles driven. However, the general concept of Pay As You Drive includes any scheme where the insurance costs may depend not just on how much you drive but how, where and when you drive.
Commercial benefits to the insurance company from better alignment of insurance with actual risk.  Improved customer segmentation.
Potential cost-savings for responsible customers
Social and environmental benefits from more responsible and less unnecessary driving

Pay as you drive (PAYD) means that the insurance premium is calculated dynamically, typically according to the amount you drive. Driving is monitored using a secure black-box device in the vehicle, linked to a national network of satellites and data recorders. The formula can be a simple function of the number of miles you drive, or can vary according to the type of driving or the identity of the driver. Once the basic scheme is in place, it is possible to add further details, such as an extra risk premium if someone drives too long without a break, or uses their mobile phone while driving.

Insurance companies have always tried to differentiate and reward "safe" drivers, giving them lower premiums and/or a no-claims bonus. However, conventional differentiation is a reflection of past history rather than present patterns of behaviour. This means that it may take a long time before safer (or more reckless) patterns of driving and lifestyle feed through into premiums.

PAYD provides a much more immediate feedback loop to the driver, by changing the cost of insurance dynamically with a change of risk, and this means drivers have a stronger incentive to adopt safer practices. For example if a commuter switches to public transport or working at home, this immediately reduces the risk of rush-hour accidents. With PAYD, this reduction would be immediately reflected in the cost of car insurance for that month.

The UK insurance company Norwich Union is currently engaged in an experimental study to assess the potential for PAYD. The experiment calculates the hypothetical change to insurance premiums, based on actual driver behaviour. But as far as we can determine, this is primarily a technical experiment is not designed to show how actual driver behaviour might be positively influenced by this, and so the systemic effect of PAYD remains untested.

PAYD is being strongly promoted by environmental and transport groups, mostly as a way of encouraging people to use their cars less.  As far as we can see, these environmental benefits are entirely compatible and complementary with the economic and ethical benefits outlined on this page.
more Norwich Union pilot study

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This page last updated on October 21st, 2003
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