Insurance: Is it time for a pay-as-you-drive car policy

By John Grant An article in the Sydney Morning Herald on the growth of on-line insurers in Australia grabbed my attention. You can read it here. The article referred to the growth of 'on-line' insurers and the growing demand for this service. You can see my earlier story on this here. There are many interesting aspects to this trend, and we have been following the strategies of two companies, Progressive Direct and Real Insurance. Progressive Direct is a very new player in the market and it is too early to judge what impact it is having in the on-line space. Real Insurance however has been around for over 5 years and it's Australian origins go back to its start up in 1999 when it provided Amway with insurance products under the Hollard brand. Real Insurance was launched in 2004 to capture the direct market after what it sees as unique opportunities in a traditional slow-growth market. They have been very successful, launching an innovative pay-as-you-drive car insurance policy - a first in the Australasian market. Cover is purchased based on the distance you plan to travel. It's sophisticated enough to take into account standard risk factors like where you live, likely average distance travelled for that location, your age, and driving habits. But by targeting these specific factors, it does result in is annual savings of between 30% and 70% for those who drive less than the average distance. While this is not new in other countries, Real Insurance have entered this on a trust basis, compared with overseas equivalents who usually require the car to be fitted with a device that reports use to the insurer. Real do this on trust and only check the speedometer at the time of a claim. Real Insurance spokesperson Roger Grobler said "the product has the potential of turning the industry on it's head, we are seeing 50% of our motor business being written on a pay-as-you-drive basis. This means we are taking policyholders away from companies who are traditionally the better risk - those who travel less kilometers. Big old well balanced books of motor insurance will be impacted by the loss of these customers. Effectively these drivers who travel less than the average 14,600kms (Australian average) are subsidising insurance for those who travel further." "What options do the companies have, when they lose the better customers? They will have to increase rates for the others or introduce a similar pay-as-you-drive scheme. Whatever they do, it will be messy in the short term while they realign their portfolio". He sees this as an opportunity that his company is poised to capitalise on. The Australian market is dominated by a couple of big organisation who have multiple brands in the market. In this respect, it is not too different to New Zealand where IAG have multiple brands - State, NZI, Lantern - and most of the products sold by banks have their origins back to a couple of companies. There seems little doubt that a product that allows you to buy insurance based on the actual time your car is on the road will have much appeal. The second family car for example that is used basically for shopping could be a winner with this type of policy. Under the Real Insurance pay-as-you-drive policy, unused kilometres are rolled over to the next year. The bad news for New Zealand consumers is that Real Insurance has no plans to set up on this side of the Tasman. Roger Grobler says they have their hands full dealing with the growth and opportunity they are experiencing in Australia. This means that it's up to one of the New Zealand companies to recognise the opportunity and offer this product. It is likely to prove very popular in a country where there are more cars per head than most, fuelled by a transport system that means a car is an essential addition for most families. Opportunity awaits. We will update developments when they are announced.