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Pay-per-mile (PPM) insurance is a growing auto insurance product segment that can help lower a driver’s monthly auto insurance premium. PPM is a variety of pay-as-you-drive (PAYD) insurance, which is primarily focused on accurately monitoring mileage driven and thus, pricing policies appropriately based on that mileage.
Simply put, PPM is usage-based insurance (UBI) that ties premiums primarily to miles driven—premiums are more personalized to each driver, based primarily on the risk factor of how much a person drives. The less a person drives, the less they pay. This can be especially useful for city-dwellers, car sharing, and those who work from home offices or don’t drive as often as the average person.
Pay-per-mile insurance policies generally follow one of two models: a bulk mileage purchase followed by a cost per mile, or a straight cost per mile policy. In either case, miles driven is the primary driver of policy cost. Due to the lower overall insurance costs for light commuters, transparency in pricing, and flexibility of PPM for non-traditional drivers, interest in PPM programs has grown rapidly in the last few years. With access to cost-effective telematics solutions for mileage monitoring, insurers are also finding PPM to be an attractive business model.
Typical PPM policies include a basic policy cost—based on an individual’s rating factors such as driving record, type of car, location, age, etc.—and then the pay-per-mile cost, which can vary by insurer but is generally just a few cents per mile. Mileage is automatically monitored to determine a driver’s monthly payment via a telematics device. Insurers are leveraging both smartphones and telematics devices such as a dongle or IoT smart tag to combat the possibility of mileage reporting fraud.
The advantages are clear for the policyholder, but what about insurers? What value does pay-per-mile bring to an agency?
First, PPM policies allow insurers to engage with policyholders more often than a standard, more reactive insurance policy. With PPM, the policyholder purchases a policy with a mileage cap. If the policyholder approaches the limit, they are notified so they can purchase more mileage in increments. Additional services such as driving trends and monthly mileage estimates can help drivers stay within their policy limit. This opens more consistent lines of communication with a policyholder. In addition, by requiring that policyholders have a telematics-enabled app on their phone, insurers gain a new channel with which to regularly engage customers.
Secondly, PPM policies allow insurers to more accurately price premiums and create a new paradigm with policyholders—emphasizing and recognizing each as an individual and building real-time policies that fit around their lifestyle and need, as opposed to traditional insurance that views and prices policyholders in bulk.
Addressing Changing Driver Demand
Some insurers may fear that the less a person drives, the lower the revenue per policy. And while this is partly true, insurers generate more revenue through the added market share of acquiring new customers—millennials who don’t drive much and would otherwise not own a policy, for example. Offerings such as PPM enable insurers to create a business relationship today with younger drivers who will grow into heavier use policies in the future. It also incentives the “car sharing” generation to do just that: share a car and work with an insurer who can offer them the type of insurance coverage they need for the shared lifestyle. In short, PPM is a way to demonstrate that insurers recognize changes and the various ways in which people drive today, and deliver policies that fit those varied driver personas.
The monthly subscription model of PPM enables insurers and policyholders to avoid the hassle of annual renewals, and puts the policyholder in control of their premium costs, as well as incenting them to reduce miles driven and adopt safer driving habits, thus reducing accidents, traffic congestion and vehicle emissions.
The use of telematics to build a PPM program also enables insurers to not only reduce fraud and improve driving habits of policyholders, but to refine and differentiate offerings through value-added services such as vehicle health and location monitoring, trip reporting and real-time mileage alerts.
Of course, the right telematics partner is crucial for insurers who want to offer such policies, especially to avoid mileage fraud. Insurers should look for a partner who has primary experience implementing telematics policies quickly and efficiently. Beyond excellent technology, they should also offer a variety of services to support a PPM program—both core services such as data collection, cleaning and analysis, but also value-added services such as crash detection, instant first notice of loss (FNOL), distracted driving monitoring and analysis, driver behavior monitoring and scoring, and risk event detection. The best telematics partner will not only help you launch a PPM program, but also improve your personal auto lines profitability.
Unique and Value-Added Solutions
The auto insurance industry will continue to evolve as insurers embrace digital, expand their use of IoT data, and address the growing mobility market. Adopting new policy options such as PPM demonstrate that insurers are keeping up with these evolutions and are able to serve policyholders with unique and value-added solutions at each stage of their driving journey.
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