Pay As You Drive (PAYD): Motor insurance ad-on that customises your premium as per driving distance

Pay As You Drive (PAYD): Motor insurance is mandatory by the government, and necessary for your vehicle's damage cover in case of an accident. In the form of an insurance claim, you get compensation for those losses. For this reason, you have no qualms about paying sizeable yearly premiums. But what if you have a car and drive it occasionally? City dwellers often prefer public transport, carpooling, or hired cabs to avoid traffic congestion, high parking charges, high upkeep expenses, or a lack of parking space. But even if they are using their car once a week or twice a month, they have to pay the same insurance premium as someone using their car daily. In a nutshell, whether you use your car regularly, occasionally, or rarely, you pay the same motor insurance. 

Is there a way to reduce the cost of insurance premiums for car owners with less use?

Car owners seeking to reduce their premium amount may opt for the Pay As You Drive (PAYD) add-on.

The Insurance Regulatory and Development Authority of India (Irdai) introduced the PAYD option in July 2022.

Akanksha Jain, Head, Motor Product, Go Digit General Insurance, says that PAYD is a type of motor insurance add-on cover wherein the premium of one's own-damage (OD) policy is determined based on how much the vehicle is driven.

In simple terms, if a customer drives less, they pay a lower premium.

How is PAYD different from normal motor insurance?

In traditional OD policies, the premium is calculated on the basis of the make, age, and location of a vehicle.

It never considers the kilometres a vehicle has driven.

A person who has driven their car for just 5000 kilometres a year pays the same premium as the person who has driven a similar-condition vehicle for 25,000 kilometres in a year.

However, from an insurance point of view, the vehicle that covered just 5,000 kilometres is at a much lower risk of damage than the vehicle that covered 25,000 kilometres.

But the PAYD add-on allows one to pay according to usage, thus reducing the premium costs.

"The introduction of a concept like PAYD allows insurers to offer better premium rates to customers who drive below a stipulated distance in a single year and are offered discounted premiums," says Akanksha.

Nitin Kumar, Head of Motor Insurance at Policybazaar.com, says PAYD introduces an equitable approach with usage-based premiums, translating that lower usage leads to higher discounts. It proves to be a cost-effective solution, especially for occasional vehicle users like urban residents relying on public transportation or someone who typically carpools or families with multiple cars. This model precisely aligns insurance costs with real vehicle usage, presenting a fair and transparent alternative to conventional fixed-rate premiums."

Policybazaar.com's data shows that PAYD plans cost up to 40 per cent less than normal plans. 

How do companies track vehicles covered under PAYD insurance?

Two types of PAYD add-ons are popular.

In the first type of plan, the insurer puts a GPS device on the vehicle and tracks its telematics data to know how many kilometres it has covered.

In the second type of PAYD plan, a rechargeable option to top up kilometres is provided in case the driving usage is exceeded.

Nitin said, "Moreover, PAYD enables the assessment of policyholders' driving habits. Safe drivers who adhere to traffic rules can get these plans with lower premiums, determined by information received from their vehicle's GPS tracker. Algorithms analyse driving behaviour, considering factors such as the driver respecting traffic signals and adhering to safe speed limits."

Are buyers really opting for PAYD plans?

In its report, Policybazaar.com, says that 30 per cent-40 per cent of the PB customers opt for the respective insurers to buy PAYD plans.

It says that customers in metro/Tier-1 cities are more prominent buyers of PAYD plans.

In its data, Policybazaar.com shows that PAYD plans cost up to 40 per cent are cheaper than the normal plans. 

"The discounts for PAYD vary from insurer to insurer. By opting for a PAYD add-on cover, one can save up to 20-25% on their Own Damage motor insurance premium," says Akanksha.